Question

[6 marks] Suppose that Australia has a 25% ad valorem import duty on T-shirts and Australian consumers purchase these imported T-shirts at a price of $10 from various fashion outlets. A proposed project would replace 200,000 T-shirts currently imported annually by domestically produced T-shirts. The company hires unemployed domestic labor having an opportunity cost of 20% of the market wage and pays them $600,000 in yearly wages. The project also causes pollution worth $70,000 per year in Australia. The all-inclusive total annual cost of the project at market prices and at efficiency prices is $1 million and $1.25 million respectively. Assuming no other benefits and costs: a. Calculate the price and annual net benefit of the project, according to: (i). Market analysis (1.5 marks) (ii). Efficiency analysis (1.5 marks) b. Assuming there are no non-Referent Group stakeholders, would you recommend the project: (i) to a private sector investor? (1 mark) (ii) to government who will only allow the private investor to proceed if it believes the project is in the public interest (2 marks) (Explain your answers clearly)

Answer 1

a. i.) Using market analysis:

Total cost if it would have been purchased and imported =(200000*10)*125% = 2500000

Cost per unit = 2500000/200000 =12.5 per unit

Now using market analysis, net benefit = Cost if imported - cost if production is done. =2500000-1670000= 830000

ii.) Now using efficiency analysis, net benefit = Cost if imported - cost if production is done. =2500000-1920000= 580000

b.i ) To a private sector investor, project would be recommended because it will be result in higher profit. Ultimately, the benefit will be passed to the customer.

ii.) Yes, the government will support the project, because it will help in employent opportunity to the local employers. Also, the hoigher saving in cost may lead to lower selling price and this will be in public interest.

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