Question

 6. Welfare effects of a tariff in a small country

 Suppose Panama is open to free trade in the world market for maize. Because of Panama's small size, the demand for and supply of maize in Panama do not affect the world price. The following graph shows the domestic maize market in Panama. The world price of maize is Pw =$350 per ton.

 On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS).

 If Panama allows international trade in the market for maize, it will import _______  tons of maize.

 Now suppose the Panamanian government decides to impose a tariff of $80 on each imported ton of maize. After the tariff, the price Panamanian _______  consumers pay for a ton of maize is $_______ , and Panama will import _______  tons of maize.

 Show the effects of the $80 tariff on the following graph.

 Use the black line (plus symbol) to indicate the world price plus the tariff. Then, use the green triangle (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan triangles (dash symbols) to shade the areas representing the net loss or deadweight loss (DWL) caused by the tariff.

Answer 1