Welfare effects of a tariff in a small country Suppose Zambia is open to free tr
ID: 1124088 • Letter: W
Question
Welfare effects of a tariff in a small country Suppose Zambia is open to free trade in the world market for soybeans. Because of Zambia’s small size, the demand for and supply of soybeans in Zambia do not affect the world price. The following graph shows the domestic soybeans market in Zambia. The world price of soybeans is =$400 per ton. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS).
Show the effects of the $40 tariff on the following graph.
Use the black line (plus symbol) to indicate the world price plus the tariff. Then, use the green triangle (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan triangles (dash symbols) to shade the areas representing the net loss or deadweight loss (DWL) caused by the tariff.
Domestic Supply 680Domestic Demand 640 600 560 520 O 480 CS PS u 440 AY a 400 360 280 0 5 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of tons of soybeans) If Zambia allows international trade in the market for soybeans, it will import tons of soybeans. Now suppose the Zambian government decides to impose a tariff of $40 on each imported ton of soybeans. After the tariff, the price Zambiarn consumers pay for a ton of soybeans is$ and Zambia will import tons of soybeans.Explanation / Answer
Answer (1):- According to the first graph, World supply curve for soyabean is perfectly elastic at price of $400 per ton. Consumer Surplus can be represented by area between demand curve and price line.
Consumer surplus = 1/2* 160 * 800
CS = 64000
Producer surplus = 1/2* 200* 160
PS = 16000
Answer(2):- Zambia is doing free trade with other countries. at the price $400 domestic supply is 40 tons. People demands 160 tons of soyabean at same price.
Economy will import 160 - 40 = 120 tons
Answer(3):- Zambian Government Imposes tariff of $200 per ton. World supply curve will shift above. now price becomes $600 per ton.
Answer (4):- In this price demand for soyabean is 120 tons and domestic supply is 80 tons. Zambian economy will imoprt (120-80) = 40 ton soyabean after imposition of tariff.
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