6. What is a tariff and what is a quota in international trade?
(a) In Tessland, suppose the domestic demand curve for sugar is given by: P = 16 – 0.05Q and the domestic supply curve is given by: P = 4 + 0.05Q:
i. In the absence of any trade, what is the equilibrium price and quantity of sugar? How much are the consumer surplus and domestic producer surplus?
ii. Suppose the equilibrium price of sugar in the world market is P = 6. How much are the new consumer surplus and new domestic producer surplus?
iii. Suppose Tessland is government imposes tariff $2 per unit (a ton) of sugar.
A. What will be the new effective price in the domestic market?
B. As a result, how much are the change in consumer surplus and change in domestic producer surplus compared to (ii)?
C. How is the loss in consumer surplus redistributed between domestic producer surplus, foreign producer surplus, government is revenue resulting from tariff and dead-weight loss to the society?
***PLEASE ONLY ANSWER FROM HERE (iv) AND BELOW. THANK YOU SO MUCH***
iv. Suppose, instead of imposing the tariff in (iii), Tessland is government imposes a quota restriction of 120 units of sugar.
A. What will be the new effective price in the domestic market?
B. As a result, how much are the change in consumer surplus and domestic producer surplus compared to (ii)?
C. How is the loss in consumer surplus redistributed between domestic producer surplus, foreign producer surplus, government is revenue resulting from quota and dead-weight loss to the society?
(b) Distinguish between a tariff and a quota. In what ways are they similar and in what ways are they different?
In: Economics
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