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1) A market has supply given by P=0.5Q and demand is given by P=20-2Q. It opens to world trade with the market price steadily at
1) A market has supply given by P=0.5Q and demand is given by P=20-2Q. It opens to world trade with the market price steadily at $2. On a graph show the gains from trade and calculate this area. Discuss if this is a pareto efficient outcome and if this was a pareto improving transaction.
2) The government decides to implement a tariff of $1. Show this on a diagram and highlight each party's new surplus. Discuss the change in surplus for all parties involved in the market (increase/decrease and why).
3) Calculate the amount of deadweight loss
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