Question

A small nation permits free trade in good X. At the good’s free-trade price of $8, domestic firms supply 6 million units and im- ports account for 4 million units. Recently, the small country has erected trade barriers with the result that imports have fallen to zero, price has risen to $10, and domestic supply has increased to 8 million units. Calculate the change in consumer surplus and producer surplus resulting from the trade barrier. What is the deadweight loss?

Answer 1

Free trade price = 8

Where QS=6 M

and Imports = 4 M so QD =6+4 =10M

When the trade falls to zero it means that the price is equal to the domestic equilibrium

P=10

QS=QD=8 M

CS in free trade = area C+D+E+F

CS decreases by area D+E+F after the trade barrier=[ 05*(8M-6M)*(10-8)] + [(10-8)*6M ]+[0.5*(10M-6M)*2] = $14 Miliion+$4 Million = $18 Million

PS in free trade = area P

PS increases by area D after the trade barrier = [ 05*(8M-6M)*(10-8)] + [(10-8)*6M ] = 2M+12M = $14 Million

DWL is the area E+F = [0.5*(10M-6M)*2] = $4 Million