Suppose that the world price of T-shirts is AUD$20 each and Australia has a 30%
ID: 1137146 • Letter: S
Question
Suppose that the world price of T-shirts is AUD$20 each and Australia has a 30% ad valorem import duty on T-shirts (i.e. the import duty is 30% of the world price). A proposed project would replace 100,000 T-shirts currently imported annually by domestically produced T-shirts. The annual cost of the project (operating cost plus annual equivalent capital cost) at market prices is $1.0 million and at efficiency prices is $0.8 million. Calculate the annual benefit of the project, net of annual operating and capital costs, according to:
a. Project or Market analysis
b. Efficiency analysis
Explanation / Answer
Before the project
Australia was importing 100,000 T-shirts in an year.
Value of Imports = 100,000 X 20 = A$ 2 million
Tariff on imports = 30% of 2 million = A$ 600,000
After the project
Annual cost = A$ 1 million (operating cost + capital cost)
Revenue on sales = 100,000 X 20 = A$ 2 million
The net benefit of the project replacing the imports with domestically produced t-shirts = 2,000,000 - 1,000,000 = A$ 1 million
Efficiency Analysis
Cost of the project (efficiency prices) = A$ 800,000
Revenue from the project = A$ 2 million
Loss to the government on tariff from Imports = A$ 600,000
Net benefit = 2,000,000 - 800,000 - 600,000 = A$ 600,000
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