How much domestic producers gain or lose from the quota

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Reference no: EM131212496

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 : 420 million pounds per year
Imports : 300 million pounds per year

The country's government now decides to 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 rights to import the 240 million pounds.

a. Calculate how much domestic producers gain or lose from the quota.

b. Calculate how much domestic consumers gain or lose from the quota.

c. Calculate how much the government receives in payment when it auctions the quota rights to import.

d. Calculate the net national gain or loss from the quota. Explain the economic reason(s) for this net gain or loss.

Reference no: EM131212496

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