ECONOMICS Commentary Essay

Submitted By ayd111
Words: 925
Pages: 4

ECONOMICS Commentary

Introduction to Theory: The concept of tariffs allows the government to manipulate the imports of the country. By doing so the government is able to control the foreign investments, the domestic market and their balance of trades. Furthermore the theory of subsidies puts across how the consumers are aided by it. By providing subsidies the government aims to encourage the production of that good and helps the lower classes grow.
Analysis:
Tariff is a tax imposed by the importing country, on the good or service imported. This tax is usually an ad-valorem tax rather than a specific tax; this is because the government wants to allow inflation.
The graph below shows the effect of a tariff imposed in Nigeria. The tariff raises the supply curve vertically upwards; the rise is equal to the amount of the tariff. Therefore the supply curve has moved from S2 to S3, giving a new equilibrium point at C. Furthermore the foreign producers lose market share (imports fall from qDq2 to qtq3), hence this is a benefit to the domestic producers. Moreover the producers producing at qDqt now receive a higher price: P3. On the other hand the consumers lose out as they pay a higher price for a less of good. The government earns revenue by the placement of the tariff, which is shown by the boxes Z and Y.

D1

S1

P1

P3

P2

S3 C Z

Y S2

Price (naira/unit qD

qt

q3

q2

Quantity (units/year

The increased tariffs in Nigeria are very relevant and are a key for the growth of the Nigerian Economy. This increase will help them eliminate the foreign competitors from the market, and will aid them in bringing up a domestic market and reviving the power sector. By doing this they will be able to boost their GDP and also reduce the imports, which will facilitate them come into a trade surplus, which will lead to economic growth. The
Nigerian economy will develop drastically as power being an inelastic good
(the responsiveness of demand being less than the change in price), the government will be able raise a lot of capital through the tariffs and this will help them raise a significant amount: this amount can be employed in the growth of Nigeria. Moreover the capital raised will help in the development of Nigeria: infrastructure and welfare of the people. Also a lot of opportunities of new foreign investments, for the reason that all the multinational will see a great scope of development. And hence will be interested in investing in the firms, as mentioned in the article.
The article also talks about the removal of the subsidy from the power sector. A subsidy is a payment from the government to the firm, which enables the firm to produce a good or service or provide the good or service at a price that is its average cost of production.
The graph below shows the effect of a subsidy discontinued. As visible in the graph below the rise in price from p1 to pE has affected the quantity demanded to fall from q1 to qE. This is majorly due to the fact that the government has removed the subsidy it provided, and hence the average cost for each unit will rise. This has resulted in a new equilibrium formation at the point E.
Demand

Supply

Supply (with Subsidy) pE

E

p1

Price
(naira per unit) qE

q1

Quantity (units per year)

The article later talks about how the removal of subsidies from the market has taken place. This shows how the government wants to remove the subsidies as they are…