Homework/ Economics

Question

Consider a small country applying a tarifft to imports of a good like that represented in Figure 8-5 shown below. (a) Home Market (b) Import Market Price Price Deadweight loss due to the tariff b + d P ” + t l. . . . + . . . . . . . . . . . . . . . . . . . . . . . . . . X* + t . ē + М. Imports s, sz Dz D, Quantity M2 M a. Suppose that the Home country decides to reduce its tariff from t tot. Redraw the graphs for the Home and import markets and illustrate this change. What happens to the quantity of goods produced at Home and their price? What happens to the quantity of imports? (Hint: As a result of the tariff reduction, the domestic price will be reduced from p+t to P+t) b. Are there gains or losses to domestic consumer surplus due to the reduction in tariff? Are there gains or losses to domestic producer surplus due to the reduction in tariff? How is government revenue affected by the policy change? Illustrate these on your graphs. c. What is the overall gain or loss in welfare due to the policy change?

Answer

Consider a small country applying a tariff t to imports of a good like that represented in Figure as shown in below.

Assume tariff reduce from t to t’

(a)

Quantity of goods produced at Home reduces from S₃ to S₂ & price decreases from (P^w + t) to P^w + t’

Quantity of imports decreases from M₃ to M_2.

_(b)

_{Gain in consumer surplus = 1 + 2 + 3 + 4}

_{Loss in producer surplus = 1}

_{Change in government revenue = (5 + 6 + 7) – (3 + 6)}

                                                   _{= 5 + 7 – 3}

                                                    _{= 9}

_{can be +ve or -ve}

_(c)

Change in SW = 

                        = (1 + 2 + 3 + 4) – (1) + (5 + 7 – 3)

                        = 2 + 4 + 5 + 7

                       = 18

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