advantage of free trade.docx - Reducing tariff barriers leads to trade creation Trade creation occurs when consumption switches from high\u00adcost

advantage of free trade.docx - Reducing tariff barriers...

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Reducing tariff barriers leads to trade creation Trade creation  occurs when consumption switches from high-cost producers to low-cost producers. The removal of tariffs leads to lower prices for consumers (Prices fall from P1 to  P2) This fall in prices enables an increase in consumer surplus of areas 1 + 2 + 3 + 4 Imports will increase from Q3-Q2 to Q4-Q1 The government will lose tax revenue of area 3. Tax revenue from imports was T  (P1-P2)  ×  (Q3-Q2) Domestic firms producing this good will sell less and lose producer surplus equal  to area 1 However, overall there will be an increase in economic welfare of  2+4  (1+2+3+4  – (1+3) The magnitude of this increase depends upon the elasticity of supply and  demand. If demand elastic consumers will have a big increase in welfare
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  • Winter '17
  • Dr. bashar

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