Question

Rank the following in descending order of Home welfare and justify your answers. If two items are equivalent, indicate this accordingly.

a. Tariff t in a small country with perfect competition.

b. Tariff t in a small country with a Home monopoly.

c. Quota with the same imports M in a small country, with a Home monopoly.

d. Tariff t in a country facing a Foreign monopoly.

Answer 1

Solution:-Here ranking is following in descending order of Home welfare using options aymbol a,b,c,d .Then ranking is c < a=b < d.A small country with free trade has equivalent levels ofwelfare under either perfect competition or monopoly. Adding a tariff in either casereduces welfare due to the deadweight loss associated with the tariff, but does notreintroduce any additional deadweight losses due to monopoly. Thus,a=b. A quotain a country with a monopoly maintains the market power of the monopolist, and thedeadweight loss due to monopoly is additive to the deadweight loss due to the quota,such that:c < a=b. Finally, a tariff with a Foreign monopoly can actually increasewelfare because it generates a terms-of-trade gain, and hence:a=b < d.