Pacifica is a small island nation. It is a relatively low-income country with a per capita income of $12,000 per year. The economy is mainly agricultural and rice is the major product and also the staple of the local diet. Because it is a small country, Pacifica's agricultural production or consumption could not influence global prices. In order to support local rice production and protect farmers from worldwide competition, Pacifica currently bans imports of rice. A bag of rice consumed on the island is produced by local Pacifica farmers. This policy benefits farmers greatly. A bag of rice in Pacifica sells for $8.00 and 500,000 bags of rice are consumed each year. If consumers were allowed to purchase rice grown abroad, they could purchase bags of rice for $5.00. A local legislator is concerned about the impact the import ban has on low-income families. This legislator proposes removing the import ban. Concerned about the livelihood of farmers, a second legislator argues that rice production should be subsidized. Since the world price of rice is $3 less than the local price, he proposes a subsidy of $3 per bag of rice. To make the policy easier to implement, the subsidy would be paid to farmers. Under his plan, rice imports would still be banned. Finally, a third legislator argues that the import ban should be removed, but they should also implement a $3 per bag subsidy on rice to help the farmers who would be adversely affected by the introduction of free trade in the rice market.

Price elasticity of demand -0.5

Price elasticity of supply 0.75

Price paid by consumers with subsidy (under import ban): $6.20

As the third legislator:

What is the net welfare (surplus) gained or lost for the economy as a whole?