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Question: 3 welfare effects of a tariff in a small country...

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3. Welfare effects of a tariff in a small country Suppose New Zealand is open to free trade in the world market for wheat. Because of New Zealands small size, the demand for and supply of wheat in New Zealand do not affect the world price. The following graph shows the domestic wheat market in New Zealand. The world price of wheat is Pw $250 per ton On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS).

570 Domestic Demand Domestic Supply 530 CS 450 PS 410 Ш 330 250 210 0 10 20 30 40 5060 70 9000 QUANTITY (Tons of wheat) If New Zealand allows international trade in the market for wheat, it will import 60 tons of wheat.

Now suppose the New Zealand government decides to impose a tariff of $80 on each imported ton of wheat. After the tariff, the price New Zealand consumers pay for a ton of wheat is $310, and New Zealand will import 60 tons of wheat. Show the effects of the $80 tariff on the following graph Use the black line (plus symbol) to indicate the world price plus the tariff. Then, use the green points (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan points (rectangle symbols) to shade the areas representing deadweight loss (DWL) caused by the tariff.

570 Domestic Demand Domestic Supply World Price Plus Tariff 490 450 s 410 Ш 330 PS 250 Government Revenue 210 DWL 0 10 20 30 4050 80 70 QUANTITY (Tons of wheat) 100

Complete the following table to summarize your results from the previous two graphs. Under Free TradeUnder a Tariff (Dollars) (Dollars) Consumer Surplus Producer Surplus Government Revenue Based on your analysis, as a result of the tariff, New Zealands consumer surplus by S , producer surplus in revenue. Therefore, the net welfare effect is a by $ , and the government collects $

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