Question

3. welfare effects of tariff in small country Suppose Bolivia is open to free trade in the world market for wheat. Because of Bolivia's small size, the demand for and supply of wheat in Bolivia do not affect the world price. The following graph shows the domestic wheat market in Bolivia. The world price of wheat is P $250 per ton. On the folowing graph, use the green triangle (triangle symbols)to shade the area representing consumer surplus (CS) when the economy is at the free-trade equwibrum. Then, use the purple triangle (diamond symbois) to shade the area representing producer surplus (P5) 40Domestic Demand Damestic Supply CS 370 P3 310 280 220 0 2 400 100 120 140 QUANTITY (Tons of wheat) 10200 f Bolivia allows intemational trade in the market for wheat, it will import tons of wheat. Now suppose the Bollvian government decldes to Impose a tariff of $60 on each imported ton of wheat. After the tarlff, the price Bollvlan consumers pay for a ton of wheat is and Bolivia will import tons of wheat Show the effects of the S60 tariff on the following graph.

Answer 1

World price= $250

If Bolivia allows international trade in the market for wheat ,it will import (160-40)= 120 tons of wheat .

Consumer surplus = (0.5)(490-250)(160)= $ 19200

Producer surplus = (0.5)(250-190)(40)= $ 1200

Total surplus = CS + PS = $(19200+1200)= $ 20400

Now suppose the Bolivian government decides to impose a tariff of $60 on each imported ton of wheat.. After the tariff, the price Bolivian consumers pay for a ton of wheat is $(250+60)= $310 and Bolivia will import (120-80)= 40 tons of wheat.

Consumer surplus= (0.5)(490-310)(120) = $ 10800

Producer surplus = (0.5)(310-190)(80)= $ 4800

Government revenue = (60)(40)= $2400

	Under free trade (Dollars)	Under Tariff (Dollars)
Consumer surplus	19200	10800
Producer surplus	1200	4800
Government revenue	0	2400

Based on the analysis, as a result of the tariff ,Bolivia's consumer surplus decreases by (19200-10800)= $ 8400 , Producer surplus increases by $3600 and Government collects $2400 in revenue. Therefore, the net welfare effect is a loss of $(8400-(3600+2400))= $ 2400