Metzler paradox


Metzler's paradox indicates the possibility that a tariff on imports reduces the price of the imported good.

The idea of ​​Metzler's paradox is based on a theoretical idea. That is to say, that the possibility exists does not indicate that this is the case in reality. Thus, Metzler indicates that it could happen.

One of the fundamental assumptions for this paradox to be possible is that the country that imposes the tariff on the imported product must be a large country with the power to affect the global demand for said good. In addition, it must also be met that the internal demand for said good is inelastic. That is, a supply curve that does not change.

Explanation of Metzler's paradox

Metzler's intuitive explanation is based on the fact that a large country with the power to influence the demand for a certain product, when it imposes a tariff, could cause a reduction in demand that would produce a drop in prices.

For the explanation we are going to use the supply and demand curves of the imported good.

According to Metzler, if the country imposes a tariff on the import of a product, obviously the total demand will be affected. In theory, by the law of supply and demand, a reduction in demand shifts the curve to the left as we see in the following image.

Since the supply curve varies very little or not at all (inelastic), this causes the total quantity produced to be maintained and, as demand falls, prices fall. Consequently the equilibrium price is lower. Thus, the Metzler paradox theoretically indicates how a tariff could lower the price of an imported good. It is called a paradox because when a tariff is imposed, the price of the product after the tariff is always or almost always higher. So let's think about any tax. Taxes, in general, cause a product to have a higher price in the market.

The objective of import tariffs is to protect the domestic industry from foreign competition. However, in this case, due to the fall in prices, it could end up harming the industry that you want to help.

Note: Metzler explains his paradox with the Heckscher-Ohlin model. However, for a simpler explanation we have explained it with the simplest model.

Criticisms of Metzler's paradox

Among the main criticisms of Metzler's paradox is that of the size of the country. For this to be fulfilled, a country must have sufficient power so that the reduction of its consumption affects the world total.

In this sense, based on the Metzler criterion, a small country could cause an increase in the prices of a certain product if it imposes a tariff. Hence, it is so important to indicate that first this would only be applicable to very large and powerful countries and, second, otherwise the effect would be the other way around.

Furthermore, some economists have criticized this paradox because it is based on a very basic assumption. It does not take into account the factors that influence changes in supply and demand. It assumes that everything else remains constant (ceteris paribus). However, in the global economy it is practically impossible that when one variable is affected it does not directly affect other variables. Additionally, it is difficult to find industries whose supply curve (paradox assumption) is perfectly inelastic or very inelastic.

Tags:  biography comparisons derivatives 

Interesting Articles