Question

1. Small Country Policy Analysis with a Positive Externality. The home country imports steel at a constant world price of 2. Home demand and supply for steel are shown in the top panel of Diagram 1 on the next page. Suppose there is a positive externality associated with steel production, and the marginal social benefit is shown in the bottom panel of Diagram 1. a) Find the values of P, D, Q, consumer surplus, and producer surplus in free trade. b) Find the total efficiency loss and increase in social benefit in the home country, when the home country imposes a specific tariff t = 2 per unit of imports. c) Find the total efficiency loss and increase in social benefit in the home country, when the home country imposes a specific production subsidy of s = 2 per unit of Q. d) Which of the three policies, free trade, the tariff, or the subsidy is best for home welfare?

Answer 1

D) as part D is not clear, it can be concluded that free trade is best as there is no efficiency loss.

and L a) In free trade i Domestic supply is 20 units. and Domestic demand is 10 units and import is s units. for, consumer demand cuire surplus il is the area and world price a which below is 81 to x 8? ( quantiy of demand at pia 2, which is not and producer surplus; = 2 x 2 x 2 = 2. for specific tarry = 2 0 the price rises by $2 g and becomes $4. x x x , а з Supply on the diagrami consumer lasa = abbtc to produces gain = a government gain=cee ney lose = bra CO 10 e of TOT gain (e) > efficiency loss heriff einer cases welfare a for production subsidy, Domestic producer price grise by $2. supply Consumer suplus=o producer surplus = a Clovernment revenue - (at) uney loes = tb. so, socard benefit decreases. he trade is best, as there is no efficiency last o out of all