Question

1. Regarding trade and tariffs:
   1. Draw the supply and demand curves for apples in Denmark using the below demand and supply schedule, and show on the graph the autarky equilibrium price and quantity.

Price	Quantity demanded	Quantity supplied
$0	8	0
$1	7	1
$2	6	2
$3	5	3
$4	4	4
$5	3	5
$6	2	6
$7	1	7
$8	0	8

2. If the world price is $2 and Denmark opens up to free trade, how many apples will they produce, how many will they consume, and how many apples will be traded?
3. Describe the effects of allowing free trade by explaining the change in the producer surplus and consumer surplus. Show on the graph. Who are the winners and losers? Is there a net benefit or net loss?
4. If Denmark adds a tariff of 50% on apples, then what is the new price, how many apples will Denmark produce, how many will they consume, and how many apples will be traded?
5. Describe the effects of the tariff by explaining the change in the producer surplus, consumer surplus, government revenue, and deadweight loss. Show on the graph. Who are the winners and losers? Does the tariff create a net benefit or a net loss?

Answer 1

a. Figure-1 in the document attached below illustrates the welfare impact of both free trade and tariff imposition on the apple market in Denmark. The y and the x-axes in figure-1 represent the price of apples in $ and the number of apples respectively. The demand and supply curves of apple in the apple market in Denmark are denoted as D and S respectively which are drawn according to the demand and supply schedules presented in the question and the autarky or no trade equilibrium price and the number of apples in the market are $4 and 4 apples corresponding to the intersection between the D and S curves that is labeled as point E in figure-1. Now, note that when the world price of apples is reduced to $2 from the equilibrium price of $4, the quantity demanded of apples becomes 6 referring to the D curve and the quantity supplied of apples becomes 2 referring to S curve. Therefore, the number of apples traded in the international market by Denmark is=(6-2)=4 apples or an import of 4 apples.

b. The initial consumer surplus in the apple market in Demark at the autarky equilibrium level is indicated as area A in figure-1 and the producer surplus is denoted as area B+C+D. Now, following free trade, the consumer surplus is represented by the area A+B+C+H+I+E+F+G+J and the producer surplus decreases to area D only. Hence, the apple consumers in Denmark gain the area B+C+H+I+E+F+G+J after the free trade becomes the winner and the producers lose the area B+C after the free trade of apples by Denmark and become the loser, in this case.

c. After Denmark implements or enforces a tariff of 50% the overall world price of apple increases from $2 to $3 and a $1 tariff is imposed on apple imports as indicated by figure-1. At the world price of $3 the quantity demanded of apples becomes 5 referring to the D curve and the quantity supplied of apples becomes 3 again referring to the S curve. Thus, the overall trade of import of apples by Denmark now becomes=(5-3)=2 apples implying that after the imposition of tariff, the apple import by Denmark decreases to 2 apples from 4 apples previously.

d. As the tariff is imposed by Denmark, the consumer surplus now becomes area A+B+H+I, and the producer surplus becomes area D+C as indicated in figure-1. Hence, compared to the free trade scenario, the apple consumers in Denmark loses an area of E+F+G+J and the producers gain the area C. Therefore, in this case, the apples consumers would be the loser and the producers gain after the tariff imposition. The total or overall tax revenue collected by the Danish government due to the tariff imposition on apple is represented by the area F+G in figure-1. However, note that the areas E and J are wasted as it doesn't belong to any of the market entities in this instance and thus, represent the deadweight loss in the apple market in Denmark due to the imposition of tariff by the Danish government.