Asmallcountrycanimportagoodataworldpriceof10perunit.ThedomesticsupplycurveofthegoodisS=50+5P,ThedemandcurveisD=400-10P,Inaddition,eachunitofproductionyieldsamarginalsocialbenefitof10.a.Calculatethetotaleffecto

Question

A small country can import a good at a world price of 10 per unit.The domestic supply curve of the good is S=50+5P,The demand curve is D=400-10P,In addition,each unit of production yields a marginal social benefit of 10.
a.Calculate the total effect on welfare of a tariff of 5 per unit levied on imports.
b.Calculate the total effect of a production subsidy of 5 percent.
c.Why does the production subsidy produce a greater gain in welfare than the tariff?
d.What would the optimal production subsidy be?

Answer 1

答：a.National welfare of a tariff 5 per unit:
e－(b+d) = 250－(62.5+125) = 62.5
b.National welfare of a production subsidy 5 per unit:
e－b = 250－62.5 = 187.5
c.Production subsidy is conform with the “specific rule”,it can avoid consumption distortion.
d.The best policy is to have producers fully internalize the externality by providing a subsidy of 10 per unit.