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# review - Equalivant quota and tax a Why doe governments...

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Equalivant quota and tax a. Why doe governments limit trade? i. Economic motivations 1. TOT (Terms of trade) effect a. A large importer can enhance total social welfare by limiting imports with an optimal tariff. b. Ex. suppose c. D us M = 6000 – 100P i. P max = 60 d. S foreign X = 200 P (rest of the world supply exports i. P min = 0 e. Dm = 6000 – 100 ( P + T) f. Sx = 200 P isn’t affected bc they don’t see the tariff. 2. so: Dm = Sx a. 6000 – 100 P – 100 T = 200 P b. 6000 – 100T = 300 P i. Solve for P in terms of T. c. Pw = 20 – 1/3 T 3. our customers will pay Pus = (20 – 1/3 T) + T a. so Pus = 20 + 2/3 T b. This means that when we put on a tariff, the foreign suppliers take on ½ of the tariff and the consumers pay for 2/3 ii. We need to find Q as a function of T. you can either use S. 1. Q = 200 Pw = 200(20- 1/3T) = 4000 – 200/3 T 2. Then find out what the areas would be numerically, and maximize w/respect to T. a. Top area = ½ (Pmax – P us)XQ i. ½ ( 60 – (20 + 2/3T) X (4000 – (200/ 3) T) b. Rectangle area = t X Q i. (½ [60 – (200 + (2/3)T)] + t ) (4000 – (200/3)T) ii. (20 – 1/3 T + T ) (4000 – 200/3 T ) iii.

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review - Equalivant quota and tax a Why doe governments...

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