Question

The following graph shows the market for wheat in Canada, where Dc is the demand curve, Sc is the supply curve, and Pw is the free trade price of wheat. Assume that Canada is a relatively small producer of wheat, so changes in its output do not affect the world price of wheat. Also assume that Canada is currently open to free trade, and domestic consumers are able to purchase wheat at the world price with negligible transportation costs. Suppose a subsidy of $80 per ton is granted to exporters in Canada, allowing them to sell their products abroad at prices below their costs. Assume that trade restrictions are also put in place in order to prevent domestic consumers from buying wheat abroad at the world price. Use the grey line (star symbols) to indicate the world price of wheat plus the subsidy on the following graph. Then use the black point (plus symbol) to indicate the price of wheat in Canada and the quantity demanded at that price. Finally, use the tan point (dash symbol) to indicate the price of wheat received by Canadian producers with the subsidy and the quantity of wheat they will supply at that price. Pw + Subsidy Q in Canada PRICE (Dolars per ton) in Canada Loss in CS 0 200 400 600 Gain in PS 800 1000 1200 1400 1600 1800 2000 QUANTITY (Tons)

Answer 1

Answer:

Export subsidy increases Pw by $80 to $280

At this price,

Qd = 200

Qs = 1400

Export = Qd - Qs = 1400 - 200 = 1200

Pw*Subsidy Ps Qin Canada PRICE (Dolars per ton) in Canada Loss in CS 0 200 400 600 1600 1800 2000 Gain in PS 300 1000 1200 1400 QUANTITY (Tons)

Loss in CS = area PsBCPw

Gain in PS = area PsFEPw

Cost of subsidy = 1200 x 80 = 96,000

Thus, The taxpayer cost of the export subsidy equals $96,000

Deadweight loss = 32,000

Loss in CS = (1/2) x 80 x (200 + 600) = 40 x 800 = 32,000

Gain in PS = (1/2) x 80 x (1000 + 1400) = 40 x 2400 = 96,000

DWL = 32,000 + 96,000 - 96,000 = 32,000

Deadweight Loss = Loss in Consumer Surplus + Cost of Subsidy - Gain in Producer Surplus

= $32,000