Reference no: EM138424

Q. Imports of peanuts into the United States are subject to a quota, set at about 1.7 million pounds per year.
a. Illustrate the free-trade equilibrium in the market for peanuts. Then show the quota's effects on domestic consumption, domestic production, imports, and price. Label carefully.

b. What are the quota's welfare effects, including both the distributional effects and the overall (net) effect on the United States? Relate the effects to your diagram in part (a).

c. In 1990, a severe drought hit Georgia, where most U.S. peanuts are grown. Illustrate the effects of the drought, assuming that policy makers don't change the quota. What happens to domestic production, domestic consumption, imports, and price as a result of the drought?

d. Assume that the United States is a small country in the peanut market. Now suppose that the peanut market is subject to an import tariff instead of the quota. The tariff is set at a level that results in the same pre-drought level of production, consumption, and price as
under the quota in part (a). Illustrate the effects of the tariff before the drought.

e. Compare the effects of the drought under the tariff with those under the quota. What are the similarities and differences?"