Upon graduation you get a job as the economic advisor to the United Nations. You

Question

Upon graduation you get a job as the economic advisor to the United Nations. Your first task is to advise them on how to punish a rogue nation which has violated several U.N. peace treaties. Your bosses know that they want the punishment to be in the form of trade restrictions by either putting a tariff on imports into the country (imposed and collected by the U.N., not the country in question) or putting a quota on imports into the country. Your job is to explain to them the consequences of imposing such trade restrictions, tell them what type of trade restriction they should impose and explain to them why, in your opinion, this would be the optimal punishment. Use our model of international trade to illustrate your answer including the impact that this policy has onthe country’s: consumer surplus, producer surplus, total economic surplus, deadweightloss, and any other measures of welfare you deem appropriate.

Explanation / Answer

Ans

It will reduce producers surplus and increase consumer surplus as price falls in the country, reduce its foreign exchange reserves and thus essential imports into country. It will make factors of production utilized intensively in production of export oriented goods poor. The Govts tax revenue will fall. The appropriate policy is tariff on imports from the nation because UN would collect revenue in the process.Thus this imposes costs on country and thus is optimal punishment.

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