Acirema is a small country, unable to affect world prices. It imports sugar at a price of $10 per bag. The demand curve in Japan is D=1000 - 25P and the supply curve is S=100 + 5P. Using a graphical analysis please answer the following questions:

a) Calculate the quantity supplied, quantity demanded, and equilibrium imports when free trade prevails.

b) Suppose an import quota limits imports to 300 bags of sugar. Calculate the production distortion loss, the consumption distortion loss, and the quota rents. Can the application of quotas improve welfare in Japan relative to free trade? Could the application of a tariff improve welfare relative to free trade?

c) Consider again the problem described in item "b" but assume that production yields a marginal social benefit (externality) of $10 for each bag produced. Can the application of quotas improve welfare in Japan relative to free

trade? Explain what would be the optimal policy (tariffs, quotas, VERs, consumption tax, production subsidies, etc.) to maximize welfare. What would the value of the optimal tool be?