Reference no: EM131244558
A small country imports sugar. With free trade at the world price of $0.10 per pound, the country’s national market is:
Domestic production 120 million pounds per year
Domestic consumption 440 million pounds per year
Imports 320 million pounds per year
The country’s government now decides to t impose a quota that limits sugar imports to 240 million pounds per year. With the import quota in effect, the domestic price rises to $0.12 per pound, and domestic production increases to 160 million pounds per year. The government auctions the right to import the 240 million pounds. Tip: draw a diagram representing the impact of a tariff first.
Calculate how much domestic producers gain or lose from the quota
Calculate how much domestic consumers gain or lose from the quota.
Calculate how much the government receives in payment when it auctions the quota rights to import
Calculate the net national gain or loss from the quota. Explain the economic reason(s) for this net gain or loss.
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