Question

This is one problem please answer the following

3. Welfare effects of a tariff in a small country Suppose Bolivia is open to free trade in the world market for wheat. Because of Bolivia's small size, the demand for and supply of wheat in Bolivia do not affect the world price. The following graph shows the domestic wheat market in Bolivia. The world price of wheat is Pw - $250 per ton. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS). STO Domestic Demand Domestic Supply 530 CS 400 450 PS PRICE (Dollars per ton) 370 330 290+ 250 210 170 10 20 00 100 30 40 50 70 QUANTITY (Tons of wheat) of Bolivia allows international trade in the market for wheat, it will import tons of wheat.

Answer 1

If Bolivia allows international trade in the market for wheat, it will import (80-20)= 60 tons of wheat.

Now, if the Bolivian government decides to impose a tariff of $80 on each imported ton of wheat, after the tariff, the price Bolivian consumers pay for a ton of wheat is ($250 + $80) = $330, and Bolivia will import (60-40) = 20 tons of wheat.

Now, the consumer surplus under free trade was 0.5*80*(570-250) = $12800.

The producer surplus under free trade = 0.5*20*(250-170) = $800

Under the tariff, the consumer surplus = 0.5*60*(570-330) = $7200

The producer surplus under the tariff = 0.5*40*(330-170) = $3200

The government revenue when the tax is $80 on each ton of wheat = 80*(60-40) = $1600.

Based on our analysis, as a result of the tariff, Bolivia’s consumer surplus decreases by $5600, producer surplus increases by $2400, and the government collects $1600 in revenue. Therefore, the met welfare effect is a loss of ($5600-$2400-$1600) = $1600.

IF YOU FIND THIS ANSWER HELPFUL, PLEASE UP VOTE.