Tariff raises domestic price in small country

Steps:

• Tariff adds a tax on imports, increasing their cost to domestic buyers.
• Perfectly elastic world supply means foreign exporters maintain constant world price, unaffected by small country's demand.
• Domestic supply curve shifts upward by tariff amount, raising equilibrium price.
• Higher price reduces quantity demanded, but price definitely rises.

Why B is correct:

• In trade models, tariff equals a wedge between world and domestic price; with elastic supply, domestic price = world price + tariff (law of one price adjusted for barriers).

Why the others are wrong:

• A: Higher price decreases domestic demand via law of demand.
• C: Government gains revenue from tariff on remaining imports.
• D: Higher price reduces import quantity demanded, decreasing supply of imports.

Final answer: B