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ECON 460 -001 and 002, Fall 2010 Example 5 1. Ukraine and Russia taxed sunflower-seed exports in an effort to promote domestic production and export of sunflower-seed oil. Other smaller agricultural exporters with export taxes include Fiji (sugar), India (hides and skins), Uganda (coffee), Colombia (coffee), Costa Rica (bananas), Guatemala (coffee), and Malawi and Zimbabwe (cotton and tobacco) Let us say that India imposes an export tax of \$10 per unit on hides and skins. At the the world price of hides and skins of \$40 per unit of a certain type of animal skin, India’s domestic production is 10 million units and it exports 5 million units. With the export tax, the domestic production falls to 9 million units and exports fall to 3.5 million units. Calculate: Change in Consumer Surplus The export tax will reduce the domestic price of the exportable good by \$10. Consumer surplus increases due to the price decrease while producer surplus will fall. Change in CS = \$10*5+(1/2)*\$10*0.5 = \$52.5 m Change in Producer Surplus = -[\$10*9+(1/2)*\$10*1]=-\$95 m

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Unformatted text preview: Tax revenues = 3.5*\$10 = \$35 m Deadweight loss = (1/2)*\$10*0.5+(1/2)*\$10*1= -7. 5 Draw a graph to show the above. Gain in CS = ABCI Loss of Producer Surplus = ABGH Tax Revenues = EFHI DW Loss = CEI + FGH S \$40 B C E F G DW Tax DW Revenues P \$30 A I H D 5 5.5 9 10 Q in millions 2. Let us assume that the free trade price of laptop monitors is \$100 and that the US levies a specific tax of \$10 . Let us say that the domestic price of laptops rise to \$105 (The US is a large country) . At the free trade price, the US produces 8 thousand units per week, and imports 16 thousand units. At the higher price of \$105, domestic production rises to 10 thousand units per week and imports fall to 10 thousand units. Calculate the following: (i) Dead weight loss: HCD+GEF =- 0.5*5*2+-0.5*\$5*4=-\$15 thousand (ii) Gain for the US from the trading partner: \$5*10 = \$50 thousand (iii) Net Gain/Loss for the US. \$50 thousand - \$15 thousand = \$35 thousand S Price \$105 A H G \$100 B C D E F D 8 10 20 24 Q in thousands...
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