Question

In: Economics

4. A small country imports sugar. With free trade at the world price of $0.10 per...

4. A small country imports sugar. With free trade at the world price of $0.10 per pound: Domestic production = 120 million pounds
Domestic consumption = 420 million pounds
Imports = 300 million pounds.

The country’s government now decides to impose a quota that limits sugar imports to 240 million pounds. With the import quota in effect, the domestic price rises to $0.12 per pound, and domestic production increases to 160 million pounds. The government allocates the licenses to import the 240 million pounds to domestic firms so that the quota rent is earned by domestic firms.

INCLUDE CALCULATIONS FOR THE FOLLOWING:

a. Calculate how much domestic producers gain or lose from the quota.
b. Calculate how
much domestic consumers gain or lose from the quota.
c. Calculate how much the government receives in payment when it auctions the quota rights to import.

d. Calculate the net national gain or loss from the quota.

Solutions

Expert Solution

After the quota, domestic consumption (million) = Domestic production + Import under quota = 160 + 240 = 400

(a)

Since the quota increases domestic price, domestic producers will gain from quota.

Producer gain = (1/2) x Change in price x (Domestic production before quota + Domestic production after quota)

= (1/2) x $(0.12 - 0.10) x (120 + 160) million

= (1/2) x $0.02 x 280 million

= $2.8 million

(b)

Since the quota increases domestic price, domestic consumers will lose from quota.

Consumer loss = (1/2) x Change in price x (Domestic consumption before quota + Domestic consumption after quota)

= (1/2) x $(0.12 - 0.10) x (420 + 400) million

= (1/2) x $0.02 x 820 million

= $8.2 million

(c)

Government quota rent = Change in price x Imports after quota

= $(0.12 - 0.10) x 240 million

= $0.02 x 240 million

= $4.8 million

(d)

Net national gain = Producer gain + Government quota rent - Consumer loss

= $(2.8 + 4.8 - 8.2) million

= -$0.6 million

A negative net national gain indicates a net national loss of $0.6 million.


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