Question

Assume that the market of medical supplies is in perfect competition.

In early April, Trump administration proposed export bans on medical supplies. Suppose America is large economy and large exporter of medical goods.

Analyze the impact of the export bans on comsumer surplus, producer surplus, government revenue, and national welfare in the US. Use a graph to assist your analysis.

Answer 1

Answer —A proposed export ban on medical supplies will hamper the market of medical goods, if the policy is implemented. No doubt the consumer surplus will increase but the production surplus, government revenue and the overall welfare of the nation will decrease. It is ovious that, if the USA is a large exporter of medical supplies, its domestic equilibrium price is lower than the world price.

At a higher price ( Pw> Pe) producers have more incentives in production of medical goods and they produce a large quantity, consequently income, employment, government revenue of the country increase. But when export is banned producers are forced to sell at the domestic equilibrium price which is lower than the world price.

The new consumer surplus (A+B+C) is higher than under trade C.S. (A), domestic availability of medical goods increases by Q' Qe amount. However producer's surplus decreases substantially by B+C+D. The overall welfare decreases by 'D' . Country's total output decreases by QeQ quantity which reduces government's tax revenue.