Question

In a Mixed Specific Factors model with two sectors, Cars (C) and Wheat (W), Capital (K) is specific to C and Land (A) is specific to W. If the government imposes a tariff on the imports of W then

A. Both owners of K and owners of A will benefit.

B. Owners of A will benefit.

C. Owners of K will benefit.

D. Neither owners of K nor owners of A will benefit.

Explain your answer in up to 200 words and using a diagram

Answer 1

The correct option is B. Owners of A will benefit. When tariff is imposed on the imports of wheat, the price of imported wheat relative to its domestic price will increase. This will decrease the demand for imports and increase the domestic demand for wheat. Since wheat production is intensive in the use of land, the demand for land to produce wheat will increase. This will push the price/rent for land and benefit the owners of land. The domestic demand for wheat shifts to the right, raising quantity demanded and price of wheat. This in turn, shifts the derived demand for land, increasing the equilibrium quantity of land and the rents obtained. These are shown in the diagram below.