The government of Bangladesh believes that production of its exportable good (Jute) generates positive externalities in its country. The world price of this good is $25. The external benefit is believed to be $2.5 per unit produced. At the free trade equilibrium, domestic consumption and production of the good are equal to 10 million units and 20 million units respectively. The demand and supply elasticities at this initial equilibrium are 2 and 1.5 respectively. You may assume that Bangladesh is small in the market for its exportable.

a. Using the relevant supply and demand curves, illustrate the market outcome. Is this equivalent to the socially optimal outcome? Intuitively, why? b. If the government could choose among the following policy options: An export tax, an export subsidy, a consumption subsidy or free trade, which policy would you recommend? What should be the magnitude of the policy intervention (i.e., what size tax/subsidy should the government use, if at all)? What is the overall welfare cost (or gain) of this policy?

c. If the government were completely unconstrained in its choice of policy instruments, what policy should it choose?

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Jute Production in Bangladesh Market Failure and Policy Options a Market Outcome vs Socially Optimal Outcome Market Outcome Bangladeshbeing a small player in the Jute marketcan be assumed to be a pric... View the full answer