d) What will be the welfare effect of the tariff in doliors? (Hint: it will be e

Question

d) What will be the welfare effect of the tariff in doliors? (Hint: it will be easiest to calculate the deadwelaht losses directly) PART 1 The figure below represents the market for oranges In Natlon A. Suppose A ls a small country and the world price for oranges is $1 e) How much is the tariff revenue (in dollors)? S1. Suppose instead that Nation A decldes to Impose an Import quota of 30 oranges f) Now what will be the amount of oranges consumed, produced domestically and imported in Naion A? What will be the price of oranges? In this case, what will be the quota rents? What would the role of import licenses have in this case? What would br the difference between an import quota af 30 and a Valuntary Export Restraint al h) of 30? l Suppose demand for oranges is expected to increase in Nation A. What would trade policy instrument wauld local producer prefer, a quota or a tariff WHY? 40 50 60 70 80 a a) Find the autarky equillbrlum (ok, the picture Isn't very exact, but you should be able to find, mare or less, quantity consumed and produced domestically, and price]. b) With free trade, what will be the equilibrium amount of oranges consumed, produced domestically, and imported in Nation A? Suppose Nation A imposes a 100% tariff on oranges. c)Now what will be the amount of oranges consumed, praduced damestically and imported in Nation A

Explanation / Answer

At the time when the nation 1 has employed tariffs, the nation was producing 20 oranges at a price of $2 on its own and importing 30 oranges from the outside world and the total demand was 50 oranges.

f) As per the situation, the nation instead of tariffs has set up an import quota of 30 oranges. This will not make many changes in the equation because the nation will still be consuming 50 oranges and produce 20 domestically and import remaining 30 oranges under a quota. Price of the oranges will remain $2. (if consumption goes beyond 50 then thigs will be different).

g) Quota rent will be $30. As the nation is only allowing 30 oranges to be imported under the quota and at a world price of $1 and selling at a price of $2. The nation is earning a quota rent of $30.

h) Here import license will allow the person who is holding the license to earn a rent instead of government earing in case of tariffs. The government will only earn a rent if the auction the quota permits or allow a certain firm to import on behalf of them. If the government is just giving the import licenses on first come first serve basis then the government is losing on all the revenue they might have earned in form of tariffs.

i) They will have the same effect. In case of import quota, the price of oranges was increasing after consuming the whole quota of 30 oranges and in case of voluntary export restraint, the price of oranges will increase after the nation has imported the total amount of oranges allowed by the exporting nation. The only difference will be in the revenue earned by the government in case of voluntary export restraint the importing nation will not get any revenue in form of tax or selling of import licenses.

j) The local producer will prefer a quota. In a quota, the price might be same as the tariff but in case of tariff the import option is always open and some goods are imported too. In case of increased demand, the goods import will increase and so will the tax revenue earned by the government. The local producers are shielded but not as much as in case of quota.

In case of quota once the limit of import is reached it's on the local producer to satisfy all the increased demand the more demand increase the more they are allowed to produce because no more goods can be imported beyond a quota.

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