Question: preferential trade agreements consider figure 1 below where country a...
Preferential Trade Agreements. Consider Figure 1 below, where country A can import apples from two alternative sources, i.e. country C, the “low cost” supplier, or country B, the “high cost” supplier. Answer the following questions:
(a) Consider a situation in which country A applies a non-discriminatory import duty t to apple imports from all countries, and assume that the tariff is non prohibitive. From which country will A import? How many apples will be imported?
(b) Consider now an alternative scenario, in which country A maintains the initial tariff on imports from country C, but establishes a customs union with country B. From which country does A now import apples? Compare the outcome in the previous question with the current one. What are the welfare effects of establishing a customs union? Can we always conclude that the CU welfare dominates the situation with a non discriminatory tariff?
(c) State the Cooper–Massell proposition, and illustrate it in this context.
Figure 1: A Customs Union