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 =

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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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 full answer

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