Question

Use the theory of demand and supply to analyze the effects of prohibiting the importation of a good such as washing machines. What happens to equilibrium price and quantity? Who does the theory imply is benefitted and who does the theory imply is harmed?

Answer 1

The prohibition leads to decrease in supply of washing machines leading to leftwards shift in supply curve to S2. The new equilibrium is at E2 where the equilibrium price increases to P2 and equilibrium quantity decreases to Q2.

The consumers are worse off as they pay a higher price and the consumer surplus thus decreases to area A. While the domestic producers are better off as the receive a higher price and the Producer surplus increases to the area BE.