Question

Consider the case where the large nation Country 2 imports Good Z and decides to eliminate its import tariff on Good Z. Suppose there is just one foreign exporter of Good Z, Country 3. (You don’t need to draw graphs for this problem.)

When Country 2’s tariff is eliminated,

(a) what happens to the price for the foreign sellers of Good Z?

(b) what happens to the tax burden on Country 3’s producers caused by Country 2’s tariff?

(c) what happens to Country 3’s terms of trade for Good Z?

(d) what happens to the domestic price for Good Z?

(e) what happens to domestic consumer surplus for Good Z?

(f) what happens to domestic producer surplus for Good Z?

(g) what happens to the world total surplus for Good Z?

Answer 1

A. Because the tariff is removed, the price of Good Z falls for foreign sellers.

B. The tax burden on Country 3's producers decreases since the lower prices in country 2 will increase demand there, thus driving prices back-up in Coutry 3.

C. The terms of trades are better since prices have increased.

D. Domestic price increases as now Country 2 demand will go up, thus reducing supply in Country 3.

E. Domestic consumer surplus is down since prices will go up.

F. Domestic producer surplus is up since prices are up.

G. Total surplus can be both positive or negative, depending upon the price change.