6. What is a tari. and what is a quota in international trade?

(a) In Tessland, suppose the domestic demand curve for sugar is given by: P = 16 0:05Q and the domestic supply curve is given by: P = 4 + 0:05Q:

i. In the absence of any trade, what is the equilibrium price and quantity of sugar? How much are the consumer surplus and domestic producer surplus?

ii. Suppose the equilibrium price of sugar in the world market is ^ P = 6. How much are the new consumer surplus and new domestic producer surplus?

iii. Suppose Tessland.s government imposes tari. $2 per unit (a ton) of sugar.

A. What will be the new e.ective price in the domestic market?

B. As a result, how much are the change in consumer surplus and change in domestic producer surplus compared to (ii)?

C. How is the loss in consumer surplus redistributed between domestic producer surplus, foreign producer surplus, government.s revenue resulting from tari. and dead-weight loss to the society?

iv. Suppose, instead of imposing the tari. in (iii), Tessland.s government imposes a quota restyriction of 120 units of sugar.

A. What will be the new e.ective price in the domestic market?

B. As a result, how much are the change in consumer surplus and domestic producer surplus compared to (ii)?

C. How is the loss in consumer surplus redistributed between domestic producer surplus, foreign producer surplus, government.s revenue resulting from quota and dead-weight loss to the society?

(b) Distinguish between a tari. and a quota. In what ways are they similar and in what ways are they di.erent?