3 Welfare effects of a tariff in a small country Suppose Zam

3. Welfare effects of a tariff in a small country Suppose Zambia is open to free trade in the world market for soybeans. Because of Zambia\'s small size, the demand for and supply of soybeans in Zambia do not affect the world price. The following graph shows the domestic soybeans market in Zambia. The world price of soybeans is Pw -$400 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) 200 Domestic Demand Domestic Supply 1100 CS 1000 900 o 800 PS 700 ?600 500 300 200 0 20 40 60 100 120 140 0 180 200 QUANTITY (Tons of soybeans) f 7ambia allows international trade in the market for soybeans, it will imnort tons of soyheans

Solution

Answer (A):- According to the first graph, World supply curve for soyabean is perfectly elastic at price of $400 per ton. Consumer Surplus can be represented by area between demand curve and price line.

Consumer surplus = 1/2* 160 * 800

CS = 64000

Producer surplus = 1/2* 200* 160

PS = 16000

Answer(B):- Zambia is doing free trade with other countries. at the price $400 domestic supply is 40 tons. People demands 160 tons of soyabean at same price.

Economy will import 160 - 40 = 120 tons

Answer(C):- Zambian Government Imposes tariff of $200 per ton. World supply curve will shift above. now price becomes $600 per ton.

Answer (D):- In this price demand for soyabean is 120 tons and domestic supply is 80 tons. Zambian economy will imoprt (120-80) = 40 ton soyabean after imposition of tariff.