Calculate the total effect on welfare of a tariff
Course:- Econometrics
Reference No.:- EM131134870

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Suppose that demand and supply are exactly as described in problem 3 but that there is no marginal social benefit to production. However, for political reasons the government counts a dollar's worth of gain to producers as being worth $3 of either consumer gain or government revenue. Calculate the effects on the government's objective of a tariff of 5 per unit.

Problem 3

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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