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A country imports 3 billion barrels of crude oil per

year and domestically produces another 3 billion barrels of crude oil per year. The world price of crude oil is $90 per barrel. Assuming linear curves, economists estimate the price elasticity of domestic supply to be 0.25 and the price elasticity of domestic demand to be 0.1 at the current equilibrium.


Economists have estimated that the marginal excess burden of taxation in the country is 0.25. Re-estimate the social net benefits assuming that 20 percent of the increase in producer surplus is realized as tax revenue under the existing tax system. In answering this question, assume that increases in tax revenues less the cost of administrating the import fee are used to reduce domestic taxes.

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Net benefits=Change in consumer surplus + After tax change in producer surplus... View the full answer

1.jpg

Price
D
S
$120(PE)
$90(PW)
D
D
3 3.25 5.8 6
Barrels(billion/yr)
Imports
with tariffs
Imports
without tariffs

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