Page 200 - The Principle of Economics

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PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE
10.
When the government of Tradeland decides to impose an import quota on foreign cars, three proposals are suggested: (1) Sell the import licenses in an auction.
(2) Distribute the licenses randomly in a lottery. (3) Let people wait in line and distribute the licenses on a first- come, first-served basis. Compare the effects of these policies. Which policy do you think has the largest deadweight losses? Which policy has the smallest deadweight losses? Why? (Hint: The government’s other ways of raising tax revenue all cause deadweight losses themselves.)
An article in The Wall Street Journal (June 26, 1990) about sugar beet growers explained that “the government props up domestic sugar prices by curtailing imports of lower-cost sugar. Producers are guaranteed a ‘market stabilization price’ of $0.22 a pound, about $0.09 higher than the current world market price.” The government maintains the higher price by imposing an import quota.
a. Illustrate the effect of this quota on the U.S. sugar market. Label the relevant prices and quantities under free trade and under the quota.
11.
a.
b.
Assume the U.S. is an importer of televisions and there are no trade restrictions. How does the technological advance affect the welfare of U.S. consumers and U.S. producers? What happens to total surplus in the United States?
Now suppose the United States has a quota on television imports. How does the Japanese technological advance affect the welfare of U.S. consumers, U.S. producers, and the holders of import licenses?
b. Analyze the effects of the sugar quota using the tools of welfare analysis.
c. The article also comments that “critics of the sugar program say that [the quota] has deprived numerous sugar-producing nations in the Caribbean, Latin America, and Far East of export earnings, harmed their economies, and caused political instability, while increasing Third World demand for U.S. foreign aid.” Our usual welfare analysis includes only gains and losses to U.S. consumers and producers. What role do you think the gains or losses to people in other countries should play in our economic policymaking?
d. The article continues that “at home, the sugar program has helped make possible the spectacular rise of the high-fructose corn syrup industry.” Why has the sugar program had this effect? (Hint: Are sugar and corn syrup substitutes or complements?)
12. (This question is challenging.) Consider a small country that exports steel. Suppose that a “pro-trade” government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad. How does this export subsidy affect the domestic price of steel, the quantity of steel produced, the quantity of steel consumed, and the quantity of steel exported? How does it affect consumer surplus, producer surplus, government revenue, and total surplus? (Hint: The analysis of an export subsidy is similar to the analysis of a tariff.)