Metzler’s paradox indicates the possibility that an import tariff will reduce the price of the imported good.
The idea of the Metzler paradox is based on a theoretical idea. That is, that the possibility exists does not indicate that it is so in reality. Thus, Metzler indicates that it could occur.
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 power to affect world demand for said good. In addition, it must also be fulfilled that the internal demand for said good is inelastic . In other words, a supply curve that does not change.
Explanation of the Metzler paradox
Metzler’s intuitive explanation is 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 lead to 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 decreases, prices fall. Consequently, the equilibrium price is lower. Thus, the Metzler paradox theoretically indicates how a tariff could bring down 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 external competition. However, in this case, due to the fall in prices, it could end up hurting 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.
Criticism of the Metzler paradox
Among the main criticisms of Metzler’s paradox is that of the size of the country. For this to happen, a country must have enough power so that the reduction in its consumption affects the world total.
In this sense, based on Metzler’s criterion, a small country could cause an increase in the prices of a certain product if it imposes a tariff. This is why 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 reverse.
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.