Essay A. Assume that Japan 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 based on Chapter 9 of our textbook, please answer the following questions:

a) (10 points) Calculate the quantity supplied, quantity demanded, and equilibrium imports when free trade prevails.

b) (10 points) 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) (5 points) How does your answer in item "b" is related to the following statement about U.S. tariffs on steel? (Note: do not forget to identify the areas of your graph as part of your answer, and apply your graph for a different country and product)

(Hufbauer and Jung (2018), the Peterson Institute for International Economics): "Our

arithmetic is stark. Steel tariffs will boost firm pre-tax earnings by $2.4 billion and create about

8,700 jobsover $270,000 of pre-tax profits for each job. Steel users will pay an additional $5.6 billion for more expensive domestic steel, thanks to protection. In other words, steel users will pay about $650,000 for each job created in the steel industry."

d) (5 points) 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?