Question

Consider a world with two countries - USA and Foreign and a competitive market of sugar in both countries.

Foreign is more efficient in the production of sugar and in a free trade equilibrium, US would

import part of its consumption of sugar. Describe graphically such trading equilibrium of sugar.

What would be the effect on the sugar price in USA and on the welfare (measured by consumer surplus, producer surplus and tariff revenue) of US when US imposes an import tariff on sugar? Argue using a graph taking into consideration that

US is a large sugar importing country.

Answer 1

As the figure below the graph shows U.S and Foreign trading with each other -

At the point when the U.S. starts exchange with outside, makers in the U.S. begin bringing sugar into the nation as the autarky cost in outside is a lot of lower than its cost in the U.S. The imports add up to the separation somewhere in the range of Q4 and Q1. The buyer surplus by virtue of exchanging increments and the maker surplus declines.

At the point when the U.S. forces a tax appeared by the line P*u+t, the import of sugar diminishes significantly and the zone of imports is the territory somewhere in the range of Q2 and Q3. The value transcends the autarky cost of outside and now the predominant cost of sugar in the U.S. is P*t.

The makers produce more from Q4 to Q3 and the imports lessen from Q1 to Q1 to Q2 and Q4 to Q3. The maker surplus increment and the purchaser surplus psychologists to a reasonable level.

The deadweight misfortune because of the duty is the region of triangles 2 and 5.