1. Welfare effects of free trade in an exporting country Consider the Kenyan mar

Question

1. Welfare effects of free trade in an exporting country Consider the Kenyan market for lemons The following graph shows the domestic demand and domestic supply curves for lemons in Kenya. Suppose Kenya's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equifibrium price of a ton of lemons and the equilbrium quantity of lemons in Kenya in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium 800 Domestic Demand Domestic Supply Eqailibrum without Trade 800 Consumer Surplus Producer Surplus

Explanation / Answer

Before the trade the equilibrium will be formed at $620 per ton price and 225 tons of lemons as quantity. To which the consumer surplus will occur as what you have already shaded with green color and the producer surplus will be the purple shaded region which you already did in first graph.

The total surolus is summation of producer and consumer surplus, Which is

Total surplus = (1/2 * 620 * 225) + (1/2 * (920-620) * 225) = $103500

Now when the trade is allowed then the seller will sell at world price which is more than domestic price that is $800.

At $800 suppy is 360 and demand is 90 ton only. Hence there is a surplus which will be supplied to other countries that is export of lemoons will take place.

The export will be 360-90 = 270 tons

Hence at $800, 90 tons will be demanded by Kenya and 360 tons will be supplied by the kenyan supplier.

Thus Kenya will export 270 tons

Without Free Trade:

Consumer surplus = 1/2 * (920-620) * 225 = 33750

Producer surplus = 1/2 * 620 * 225 = 69750

With International Trade :

Consumer surplus = 1/2 * (900-800) * 90 = 4500

Producer surplus = 1/2 * 800 * 360 = 144000

When Kenya allows free trade consumer surplus decreases by (33750 - 4500 ) = 29250

and producer surplus increases by 144000 - 69750 = 74250

Net effect is increase by 74250 - 29250 = 45000

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