Timmy has a competing lemonade stand with your kid, and he charges $1 for a glass and you charge $3 for a glass. Rather than lowering your prices, you place a $2.50 tariff on any lemonade from Timmy in your neighborhood. Now everyone pays $3.50 for his lemonade, and it only makes sense for your kid to charge $3.50 as well, because Timmy’s lemonade has to get to your neighborhood while yours is local, so why not pocket that 50 cents.
In this scenario, Timmy cannot sell his cheaper lemonade to your neighborhood at a cheaper price. Everyone in your neighborhood must pay the new inflated price. People in other neighborhoods will go to Timmy, so only your neighborhood buys your lemonade, although some people will try to circumvent the tariffs by buying Timmy’s same lemonade for $2 in a neighboring area.
Timmy has a competing lemonade stand with your kid, and he charges $1 for a glass and you charge $3 for a glass. Rather than lowering your prices, you place a $2.50 tariff on any lemonade from Timmy in your neighborhood. Now everyone pays $3.50 for his lemonade, and it only makes sense for your kid to charge $3.50 as well, because Timmy’s lemonade has to get to your neighborhood while yours is local, so why not pocket that 50 cents.
In this scenario, Timmy cannot sell his cheaper lemonade to your neighborhood at a cheaper price. Everyone in your neighborhood must pay the new inflated price. People in other neighborhoods will go to Timmy, so only your neighborhood buys your lemonade, although some people will try to circumvent the tariffs by buying Timmy’s same lemonade for $2 in a neighboring area.