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Unformatted text preview: Chapter 14 - The Impact of Trade Policies CHAPTER 14 THE IMPACT OF TRADE POLICIES V. Answers to End-of-Chapter Questions and Problems 1. The winners are: Producers = (2,000)($1.20) + (0.5)(300)($1.20) = $2,580 Government = (200)($1.20) = $240 The losers are: Consumers = (2,500)($1.20) + (0.5)(100)($1.20) = $3,060 Societys deadweight losses = (0.5)(300)($1.20) +(0.5)(100)($1.20) = $240; also = ($3,060 - $2,580 - $240) = $240 2. An equivalent subsidy would shift the supply curve down vertically by $1.20. Producers would thus be willing to supply 2,300 units at the world price of $12, consumers would continue to demand 2,600 units, and imports would fall from 600 to 300 units. In this instance, there would be no loss in consumer surplus because the consumer price does not change. Producers would again gain producer surplus equal to $2,580, there would be a deadweight production efficiency loss (societys total deadweight loss) of $180, and the entire subsidy program would cost the taxpayers (consumers?) $2,760. If the consumers are the taxpayers, they should prefer the subsidy program at a cost of $2,760 in taxes to the loss of consumer surplus under the tariff of $3,060. 3. A quota differs from a tariff in that the quantity of imports is fixed and domestic price adjusts, whereas with a tariff, the domestic price is altered and quantity adjusts. The effects on consumers and producers of a quota are analogous to those of an equivalent tariff. However, there is no tariff revenue generated for the government. The equivalent of the tariff revenue that is generated with a quota (often referred to as the quota rent) can go to the government if the right to import (the quota rights) are auctioned off by the government. right to import (the quota rights) are auctioned off by the government....
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- Fall '08
- International Economics