A small country can import a good at a world price of 10 per unit. The domestic
Question:
A small country can import a good at a world price of 10 per unit. The domestic supply curve of the good is
S = 20 + 10P
The demand curve is
D = 400 – 5P
In addition, each unit of production yields a marginal social benefit of 10.
a. Calculate the total effect on welfare of a tariff of 5 per unit levied on imports.
b. Calculate the total effect of a production subsidy of 5 per unit.
c. Why does the production subsidy produce a greater gain in welfare than the tariff?
d. What would the optimal production subsidy be?
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Step by Step Answer:
Without tariffs or subsidies we compute domestic production as S 20 10 10 120 and domestic consumption as D 400 5 10 350 for imports of 230 a To analy...View the full answer
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Related Book For 
International Economics Theory and Policy
ISBN: 978-0273754206
9th Edition
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
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