Country Y imports wheat. Domestic demand is $Q_D = 800 - 10P$ and domestic supply is $Q_S = 5P$, where $P$ is the domestic price. The world price is $\$30$ per unit.

The government is considering two policies that will restrict imports to the same quantity:

(a) Impose a specific import tariff of $\$6$ per unit.
(b) Impose an import quota that limits imports to the quantity that would result from the tariff. The quota licences are auctioned, so the government captures the quota rent.

For each policy, calculate:
1. The domestic price of wheat.
2. The quantity imported.
3. Consumer surplus, producer surplus and (where applicable) government revenue or quota rent.
4. The change in national welfare relative to free‑trade.

Which policy yields the higher national welfare?

Question

Country Y imports wheat. Domestic demand is $Q_D = 800 - 10P$ and domestic supply is $Q_S = 5P$, where $P$ is the domestic price. The world price is $\$30$ per unit.

The government is considering two policies that will restrict imports to the same quantity:

(a) Impose a specific import tariff of $\$6$ per unit.
(b) Impose an import quota that limits imports to the quantity that would result from the tariff. The quota licences are auctioned, so the government captures the quota rent.

For each policy, calculate:
1. The domestic price of wheat.
2. The quantity imported.
3. Consumer surplus, producer surplus and (where applicable) government revenue or quota rent.
4. The change in national welfare relative to free‑trade.

Which policy yields the higher national welfare?

Accepted Answer

Both policies give a domestic price of $36, imports 260, CS $9,680, PS $3,240, government revenue/rent $1,560 and a welfare loss of $270. With rent captured the policies are equivalent; otherwise the tariff is superior.

Gce Model Questions Vol1 2022 Economics Question 23

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