Question

. Assume you are working for the US government. The president wants your department to study the clothing market. The US governments need to raise revenues from the Clothing market, and you are assigned to study the cotton shirt market. You have access to the previous data:

- If P = 20 then ???? = 80. If P = 30 then ???? = 70. - If P = 20 then ???? = 25. If P= 30 then ???? = 40.

The US government needs at least 200 dollars of revenues raised from this market. If you raise more than that the government will accept the money but the president prefers you only raise that amount. So, make sure you do not make people pay too much unless you must. (The government revenue >= 200)

a.) First you try to impose a tax. You consider imposing T dollars tax on each shirt being sold. You can impose this tax on buyers or the sellers. Which one do you prefer? How much will be the tax imposed on each shirt? How much will the consumer surplus and producer surplus in this market change after you introduce this tax? (10 points)

b.) Now assume that the President just signed a free trade agreement with the Japanese prime minister. This means that the shirt market is operating under free trade now with the world price of 20 dollars. Instead of taxing the market now you can impose a tariff to raise revenues for the government without hurting the domestic producers. How much will be tariff you impose on foreign made shirts? How much will the consumer surplus and producer surplus change after you impose this tariff. (10 points)

c.) Now that the shirt market is open to foreign producers as well, you can tax, impose a tariff or use a combination of both. What will you do? Each option has its own weaknesses and strengths. Provide an optimal policy for the US government to raise the needed revenues while minimizing the damage to the American consumers and producers. Defend your answer. (10 points)

Answer 1

A) Tax to be imposed on suppliers as if we impose tax from 30% to 45% that would still be a situation if consumer surplus .As price per unit of good will be 30% of $30 = %39/ unit to 45% of $30 = $43.5 .

As if tax rate increases over it for example to 50% that would not be a situation of consumer surplus because in that case producer will be in surplus over charging high rates / unit of product .

B) Imposing tariffs on goods means rates charged over goods to be imported from other countries as the market price of product will remain same .Thus ,here price of shirt is $ 20 that will remain same as revenue from tariffs will be of government .Thus here producer and Consumer surplus will remain same and if price remains unchanged consumer will be in surplus for long term .Here if government feels like it's in surplus than will allow free trade of goods from country to country but if government feels like it's in deficit than to raise revenue it can impose tariffs on imported goods from other countries .

As here consumer is in surplus so no tariff should be charged .

But if here revenue of Govt falls From 200$ than tariffs would be imposed on imported goods .

Average tariffs charged over goods imported .

C) Govt. Of a country will always make a decision that would be in favour of it's consumers and producer's .Here till the level of equilibrium if shirt price remains below or equal to $ 45/ unit than both the producer and Consumer would be in surplus but if in case price of shirt goes up demand of product will be less from before and supplied products would be more than govt will have to impose taxes over producer as they would be charging more price of product from consumer and in case if price goes low market will demand more so to cover market demand Govt. will have to set a minimum market price for such product which would enter the market after tariff imposed over it from another country .

Thus like this depending upon market situation we can impose tax and tariffs in a country .