The world price of rice is currently $450 per metric ton. Assume that South Kore
ID: 1141090 • Letter: T
Question
The world price of rice is currently $450 per metric ton. Assume that South Korea is currently charging a $100 per metric ton tariff on imported rice. Assume that currently South Korean rice consumption is three million metric tons, South Korean rice production is 2.9 million metric tons, and South Korean rice imports are 100,000 metric tons. Economic analysts predict that if South Korea eliminates the $100 per metric ton tariff, then South Korean consumption of rice will rise to four million metric tons, and South Korean rice production will fall to two million metric tons. Analysts also believe that if South Korea removes the tariff, that will cause the world price of rice to rise from $450 per metric ton to $475 per metric ton. Use this information to answer the first seven questions. First, what is the current price of rice (per metric ton) in South Korea? QUESTION 2 What will the price of rice be in South Korea if it eliminates the tariff? QUESTION 3 What would the change in consumer surplus be in South Korea if it eliminates the tariff? If the change is negative (CS goes down), put a minus in front. If CS goes up, it is a plus. Express in millions of dollars QUESTION 4 What would the change in producer surplus be in South Korea if it eliminated the tariff? Again, use a minus sign if it goes down. Also, express the answer in millions of dollars.Explanation / Answer
(Question 1)
Before tariff, South Korean price was $450 which was the world price. With imposition of $100 tariff.
Current price = $450 + $100 = $550
(Question 2)
After elimination of tariff, price in South Korea = World price = $450
(Question 3)
With imposition of tariff, domestic consumption (demand) = 3 million MT (price = $550).
In absence of tariff, domestic consumption (demand) = 4 million MT (price = $450).
Change in consumer surplus = (1/2) x Unit tariff x (Domestic consumption with tariff + Domestic consumption without tariff)
= (1/2) x $100 x (3 + 4) million
= $50 x 7 million
= $350 million
(Question 4)
With imposition of tariff, domestic production = 2.9 million MT (with price = $550).
In absence of tariff, domestic production = 2 million MT (with price = $450).
Change in producer surplus = - (1/2) x Unit tariff x (Domestic production with tariff + Domestic production without tariff)
= - (1/2) x $100 x (2.9 + 2) million
= - $50 x 4.9 million
= -$245 million
(A tariff increases producer surplus, therefore when tariff is eliminated, producer surplus falls)
(Question 5)
After tariff is imposed, Imports (million MT) = Domestic consumption - Domestic production
= 3 - 2.9
= 0.1
Tariff revenue = Unit tariff x Imports = $100 x 0.1 million = $10 million
Therefore, if tariff were eliminated,
Change in tariff revenue = -$10 million
NOTE: As per Answering Policy, first 5 parts have been answered.
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