Question

In: Economics

Consider a world with three houses, Atreides, Corrino, andHarkonnen, who trade in the spice melange....

  1. Consider a world with three houses, Atreides, Corrino, and Harkonnen, who trade in the spice melange. Due to political reasons, Atreides and Corrino form a customs union. Corrino produces melange at the cost of 14 solaris per pound, while Atreides and Harkonnen do so at 16 and 10 solaris per pound, respectively. Let the original tariff rate faced by Corrino (on exports to Atriedes) be 5 solaris. What is the impact of the customs union on trade for Corrino? What is the impact of the customs union on Harkonnen? **

Solutions

Expert Solution

Custom Union :

First we need to understand the concept of custom Union formed by Atredies and Corrino has formed is done so that the participating nations adopts a common external tariff and commercial policy on imports from outside world and abolish all trade barriers among themselves. Thus, all members act as one unit in their trade relation with non member nation; example European Union

Corrino's impact -

  • Corrion's has priority over Atredies for trade than Harkonnen. Cause they two has custom Union
  • Owing to which though Carrion is producing at 14 pound i.e. C14 at supply SC which is lower if taking together Harkonnen and tariff i.e. at price 15 pound and supply at SH + T .that is supply price of Harkonnen and tariff.

Harkonnen impact -

  • It is producing at H10 price that is 10 pound , supply of SH
  • Which is lower than Carrion at C14 however with tax it is higher than Harkonnen
  • This will clear the market for Harkonnen ,even though it's actually price of producing the spiece is low. Still due to custom Union there is tax imposed .
  • Harkonnen price will be more than Carrion,

Conclusion :

The total analysis is that owing to custom union the Atredies and Carrion can trade without any tax which makes it better option than Herkonnen as it is out of custom union and has to pay tax along with production cost making the total cost higher.

(However I have given certain markings on diagram in case you need any specific explaination, you can ask via comment.)


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