1. 1. Welfare effects of free trade in an exporting country

Consider the Kenyan market for lemons.

The following graph shows the domestic demand and domestic supply curves for lemons in Kenya. Suppose Kenya's government currently does not allow international trade in lemons.

Use the black point (plus symbol) to indicate the equilibrium price of a ton of lemons and the equilibrium quantity of lemons in Kenya in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium.

Equilibrium without TradeConsumer SurplusProducer Surplus04590135180225270315360405450920860800740680620560500440380320PRICE (Dollars per ton)QUANTITY (Tons of lemons)Domestic DemandDomestic Supply

Based on the previous graph, total surplus in the absence of international trade is

.

The following graph shows the same domestic demand and supply curves for lemons in Kenya. Suppose that the Kenyan government changes its international trade policy to allow free trade in lemons. The horizontal black line (PWPW) represents the world price of lemons at $800 per ton. Assume that Kenya's entry into the world market for lemons has no effect on the world price and there are no transportation or transaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.

Use the green triangle (triangle symbol) to shade consumer surplus, and then use the purple triangle (diamond symbol) to shade producer surplus.

Consumer SurplusProducer Surplus04590135180225270315360405450920860800740680620560500440380320PRICE (Dollars per ton)QUANTITY (Tons of lemons)Domestic DemandDomestic SupplyPW

When Kenya allows free trade of lemons, the price of a ton of lemons in Kenya will be $800. At this price,

tons of lemons will be demanded in Kenya, and

tons will be supplied by domestic suppliers. Therefore, Kenya will export

tons of lemons.

Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade.

	Without Free Trade	With Free Trade
(Dollars)	(Dollars)
Consumer Surplus
Producer Surplus

When Kenya allows free trade, the country's consumer surplus______________ by

, and producer surplus _____________________ by

. So, the net effect of international trade on Kenya's total surplus is a __________________ of