A small country possesses two types of perfectly competitive industries - heavy industries and light industries: The heavy industries face competition from imports, which are perfect substitutes for these industries' output. The light industries produce both for the domestic market and for export. Now the heavy industries are unionized and the new unions bargain successfully for higher wages in those industries. Some workers are displaced but all of the displaced workers find jobs in light industries.

a. What is the effect of the creation of the unions on the general equilibrium of this economy? Illustrate your answer by means of diagram(s). You may assume that the heavy industries are relatively capital intensive.

b. Illustrate and discuss what effects introducing an import tax would have in this situation. c. Would you suggest using another policy instrument to deal with this issue and if so, what would you suggest? Illustrate, by means of an appropriate diagram, why you would prefer this (these) policy instrument(s) rather than adopting an import tax