Trade Issues in Brianland: Free Trade vs. Tariffs for Economic Growth in the US - Prof. An, Exams of Development Economics

Download Trade Issues in Brianland: Free Trade vs. Tariffs for Economic Growth in the US - Prof. An and more Exams Development Economics in PDF only on Docsity! ECON 474 Economic Development Trade problem Consider an economy, the United States of Brianland (USB), that imports shoes. For simplicity, assume that USB has no domestic shoe industry. a) On a diagram, draw the domestic demand curve and the foreign supply curve for shoes to the USB and show the free-trade equilibrium. Mark off the equilibrium price (p*) and the equilibrium quantity of the good. Shade the amount of consumer and producer surpluses generated by the equilibrium. p* q* USB demand Foreign supply Consumer surplus Producer surplus Equilibrium b) Now draw another diagram which displays a tariff at rate t on the good. Show the new equilibrium price and quantity. Note that consumer surplus has declined and so has producer surplus. But now there is positive tariff revenue. Shade all the areas corresponding to consumer surplus, producer surplus, and tariff revenue. Note that their sum is less than their sum in part a). You have just shown that the sum of producer surplus, consumer surplus, and tariff revenue is maximized at the free trade point, where tariff revenues are zero. P ric e Quantity USB demand Producer surplus USB consumer surplus Tariff revenue Supply curve shifts up because the final cost of the good has to be higher for the producers to get the same return c) Show by drawing a third diagram that if the supply curve is horizontal, a zero tariff also maximizes the sum of consumer surplus and tariff revenue alone. Interpret this result as stating that for a country which is unable to influence the price of its imports, the optimal tariff is zero. P ric e Quantity USB demand Foreign supply with no tariff Foreign supply with tariff USB consumer surplus Tariff revenue The triangle to the right of the tariff revenue box represents the deadweight loss, which the USB suffers if the supply curve is horizontal.