Question

Question 4: China is a large exporter of rare earths. The free trade price of a specific type of rare- earth is $20 per unit. Let us say that China imposes an export tax of $4. This increases the international price of rare-earths to $23. The following are the domestic production and exports of rare-earth before and after the tax in China: Quantity produced in free trade: 10 million; Quantity exported in free trade: 4 million Quantity produced with tax: 8 million; Quantity exported with tax: 1 million a. Draw graphs for China and its trading partner to examine the welfare effects: (5 points) b. Calculate the following: (1) Change in Consumer Surplus. (3 points) Change in Producer Surplus. (3 points) (iii) Deadweight loss. (3 points) (iv) Gains transferred from China's trading partners to China. (3 points) Net welfare gain/loss in China. (3 points) (vi) Net welfare gain/loss in China's trading partners. (3 points)

Answer 1

when china imposes an export tax, domestic market's price will decrease. world prices for tyre has increased. After the tax, the price of tyre in china falls to PTEX

1)consumers surplus= e

2)producer surplus=e+f+g+h

government revenue=c+g

5)national welfare=c-(f+h)

as the price of the tyres falls in domestic markets consumers in china gets benefitted.

producer in china experience worse off. decreases producer surplus as the price of the products falls, quantity of tyres also falls, profit also reduces.

the china governments receive export tax. national welfare is positive.

China's Trading Partner

national welfare=b+c+d

cosumer of tradind partner's country for tyres experience a reduction in the well being as a result of export tax.

producer in the importing country experience a increase in well being as a rsult of export tax.

export tax reduces national welfare of trading partner's country.

reduces gains from trade.

l Exporting country .PIM I a PET b c PEX Importing Country - s to 1 I