Suppose demand and supply are exactly as described in Problem 3, but there is no marginal social benefit to production. However, for political reasons, the government counts a dollar’s worth of gain to producers as being worth $5 of either consumer gain or government revenue. Calculate the effects on the government’s objective of a tariff of 10 per unit.

Data Problem 3

A small country can import a good at a world price of 5 per unit. The domestic supply curve of the good is S = 10 + 10P.

The demand curve is D = 600 - 5P.

In addition, each unit of production yields a marginal social benefit of 15.

a. Calculate the total effect on welfare of a tariff of 10 per unit levied on imports.

b. Calculate the total effect of a production subsidy of 10 per unit.

c. Why does the production subsidy produce a greater gain in welfare than the tariff ?

d. What would the optimal production subsidy be?