PROBSET3 - August 2004 Problem set 3, International Trade...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
August 2004 Problem set 3, International Trade Domestic supply and demand are given by the curves S(p) and D(p). Domestic consumption of the quantity D results in social environmental cost γ D. 1 This cost is external to consumers and producers. The country is small, and is able to trade on the world market at price p w . The autarky price is p ¯ in the absence of government regulation. The social welfare function is the sum of consumer and producer surplus, minus environmental damage plus any tax revenues (minus any program costs) that arise from government intervention. Where you are asked to use graphs, label the areas carefully. Where you are asked for an explanation, you should be brief (no more than a couple of sentences). Draw figure 1 with linear supply and demand curves S(p) and D(p), and social marginal value of consumption, p -1 (D) - γ , where p -1 is the inverse demand function. 2 a) What is the first best policy (i.e., the policy that maximizes the sum of producer and consumer surplus minus environmental cost plus tax revenue) if there is no trade? In figure 1 label the consumer price without trade, under the first best policy, as p a . What is the first best policy if there is trade? (Remember, the country is small.) b)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/01/2008 for the course ARE 201 taught by Professor Karp during the Fall '07 term at Berkeley.

Page1 / 2

PROBSET3 - August 2004 Problem set 3, International Trade...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online