Question

Consider a situation where the Basic Tariff Model holds for a country that imports Commodity S. Initially, the country has trade with tariffs on Commodity S. It then changes its policy and gets rid of the tariff on Commodity S and allows trade of S at the world price. Answer the following assuming there is/was no foreign retaliation.

(a) What happens to the price of S in the country?

(b) What happens to the amount of domestic production of S in the country?

The amount of domestic consumption of S in the country?

(c) Domestically, who gains from this change in policy?

(d) Domestically, who loses from this change in policy?

(e) Domestically, what happens to Total Surplus as a result of this change in policy? Why?

(f) In other countries, who gains?

Answer 1

a) When the nation starts the import of a certain good it is always at the lower price, The price of S in the country will decrease as the world price of S must be lower than the local price.

b) The amount of domestic production will decrease in the local country because of a fall in the price of the goods. And at a lower price the domestic consumption will rise.

c) Domestically, the local consumer will gain from this policy. They will be consuming more resulting in higher surplus.

d) The domestic producer of the goods will be loosing from this change in policy.

e) The total decrease in the producer surplus will be less than the increase in the consumer surplus. Overall, total surplus will rise in the market.

f) IN other country the producer who are able to supply more will gain.