ECON 2010 Lecture Notes - Lecture 16: Deadweight Loss, Free Trade, Economic Surplus
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29 Nov 2016
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You want to tax inelastic goods to minimize dead weight loss. If domestic price is greater than the world price you import it (sugar). In this scenario, buyers are better off but sellers are hurt because prices will go down. If the domestic price is less than the world price you export it (technology). In this scenario sellers are better off but consumers are hurt because prices will increase. Free trade creates new wealth which makes people better off. Whoever has the higher surplus is the winner of the transaction. Tariffs are per-unit taxes on imports and exports that raise the world price. They serve two purposes, to increase revenue and protect resources. Export tariffs benefit consumers but hurt domestic firms (rare) Import tariffs benefit domestic firms but hurt consumers. Consumer surplus= pre-trade: a, post-trade: a+b+c+d+e+f+g, post-trade + tariff: a+b+c. Producer surplus= pre-trade: b+d+h, post-trade: h, post-trade + tariff: d+h. Dwl= pre-trade: c+e+f+g, post-trade: none, post-trade + tariff: e+g.
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Related Questions
1. If we know that Canada exports maple syrup, we can conclude that maple syrup consumers in Canada are worse off than they would be in the absence of trade.
Is the statement true or false?
2. When a country opens up to trade in a good for which it has a comparative advantage, and the country begins to export the good, we can conclude that:
a. |
The domestic price will fall after trade opens up. |
|
b. |
The total surplus for this good will increase as a result of opening up the market to international trade. |
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c. |
Opening the market to international trade will create a deadweight loss. |
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d. |
Both buyers and sellers in that country will be better off as a consequence of opening up the market to international trade. |