Question

HW Tariff: Large Country Case Suppose that there are only two trading countries: one importing country and one exporting country. The supply and demand curves for the two countries are shown below. Prr is the free trade equilibrium price. At that price, the excess demand by the importing country equals excess supply by the exporter. Welfare Effects of a Tariff: Large Country Case Importing Country Exporting Country P A D H b C C PT E PT C F G S D DP SP Q The quantity of imports and exports is shown as the When a large importing country implements a tariff it will cause an increase in the price of the good on the domestic market and a decrease in the price in the rest of the world. Suppose after the tariff the price in the importing country rises to Par and the price in the exporting country falls to Par. If the tariff is a specific tax, then the tariff rate would be T-Par-PEXT The Table below provides a summary of the direction and magnitude of the welfare effects to producers, consumers, and the governments in the importing and exporting countries. The aggregate national welfare effects and the world welfare effects are also shown. Table A: Welfare Effects of an Import Tariff Importing CountryExporting Country Consumer Surplus -(A+ B+C+D) Producer Surplus Govt. Revenue + e +A -(e+f+g+h) 0 +(C+G) +G-(B+D) - (B+D) -(f+ h) National Welfare World Welfare -+8+h)

Answer 1

Exporting Country Consumer Surplus e - 500005 - X0520000 2 25000 - 5000 - 20000 Prodmer Surplus - (aft gth) - 0.570,000) + vos X1000 = 35000 + 2500 - 37500 Cront revenue o National welfare & - (ftgth) x 20000 X0.520000 DOSH x 10000 x0.5 = [+500 +10000] 2 -17.500 world welfore . If thy - 2000DX0.5) - 10000XOS S -7500 15000 20000 3004'COO 07600 griporting Country Consumer Surplus - (A B+ CD) (7.3-6050 Doo + f (7.36) x 1000 2 65000 + 6500 = -71500 Producer Surplus a A (1-3) 200o6 - 1 x 1.3x5000 2 26000 - 3250 = 22750 Gront venuent = ctG z 20000 of 7.3-5.5) 36000 National Welfare - 9-(B+D) - 6 2 20000 (6-5.5) 2 10000 B+D a 1 x 1 3x 10000 th x 1.3410000 213000 World Welfore. - 3000 - (B+ ) - 13000