Question

5. You have been asked to quantify the effects of removing a country’s tariff on sugar. The hard part of the work is already done: Somebody has estimated how many pounds of sugar would be produced, consumed, and imported by the country if there were no sugar duty. You are given the information shown in the table.

Situation with Import Tariff $0.10 per pound $0.02 per pound $0.12 per pound Estimated Situation without Tariff $0.10 per pound 0 $0.10 per pound World price Tariff Domestic price Domestic consumption (billions of pounds per year) Domestic production (billions of pounds per year) Imports (billions of pounds per year) NO

Calculate the following measures:

a. The domestic consumers’ gain from removing the tariff.

b. The domestic producers’ loss from removing the tariff.

c. The government tariff revenue loss.

d. The net effect on national well-being.

Please No bad handwriting! Thanks :)

Answer 1

a. The domestic consumers’ gain from removing the tariff

area F + D + C + E

0.5*tariff rate*(quantity demanded after tariff + quantity demanded before tariff)

= 0.5*(0.02)*(20 + 22)

= $0.42 billion

b. The domestic producers’ loss from removing the tariff

area F

0.5*tariff*(quantity supplied before tariff + quantity supplied after tariff)

= 0.5*(0.02)*(6 + 8)

= $0.14 billion

c. The government tariff revenue loss

area C

tariff*reduction in imports

= 0.02*(8 - 6)

= $0.04 billion

d. The net effect on national well-being

area D + area E

= 0.5*0.02*(8 - 6) + 0.5*0.02*(22 - 20)

= $0.04 billion

Price (s) 0.12 010 F D C E 68 20 22 (quantity demanded and supplied)