A country has a monopoly that is protected by a specific tariff, , on imported goods. The

A country has a monopoly that is protected by a specific tariff, τ, on imported goods. The monopoly’s profit-maximizing price is p*. The world price of the good is pw, which is less than p*. Because the price of imported goods with the tariff is pw + τ, no foreign goods are imported. Under WTO pressure the government removes the tariff so that the supply of foreign goods to the country’s consumers is horizontal at pw. Show how much the former monopoly produces and what price it charges. Show who gains and who loses from removing the tariff. (Hint:

Look at the effect of government price regulation on a monopoly’s demand curve in Section 11.7 or the figure in the Challenge Solution.)