Consider a small country applying a tariff, t, to imports of a good like that you...

 

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Consider a small country applying a tariff, t, to imports of a good like that you have seen in lecture slides. (a) Suppose that the country decides to reduce its tariff to t'. Re- draw the graphs for the Home and import markets and illustrate this change. What happens to the quantity of goods produced at Home and their price? What happens to the quantity of imports? What about the changes to domestic consumer surplus, producer surplus, government revenue, deadweight loss and overall welfare gain/loss due to the policy change? Please clearly indicate these changes in graphs for both home and import markets. [10 marks] (b) Now consider instead now that Home is a large country ap- plying the same tariff, t, to imports of a good. How does the export supply curve in the world import market compare with that in the small country case (part a)? Explain why these are different. [5 marks] (c) When Home is a large importing country, how does the size of the terms-of-trade gain compare with the size of the deadweight loss when (i) the tariff is very small, and (ii) the tariff is very large? Please draw both situations on the same set of graphs (for home market and import market) to illustrate your answer. [15 marks] Consider a small country applying a tariff, t, to imports of a good like that you have seen in lecture slides. (a) Suppose that the country decides to reduce its tariff to t'. Re- draw the graphs for the Home and import markets and illustrate this change. What happens to the quantity of goods produced at Home and their price? What happens to the quantity of imports? What about the changes to domestic consumer surplus, producer surplus, government revenue, deadweight loss and overall welfare gain/loss due to the policy change? Please clearly indicate these changes in graphs for both home and import markets. [10 marks] (b) Now consider instead now that Home is a large country ap- plying the same tariff, t, to imports of a good. How does the export supply curve in the world import market compare with that in the small country case (part a)? Explain why these are different. [5 marks] (c) When Home is a large importing country, how does the size of the terms-of-trade gain compare with the size of the deadweight loss when (i) the tariff is very small, and (ii) the tariff is very large? Please draw both situations on the same set of graphs (for home market and import market) to illustrate your answer. [15 marks]