Question 1

A country named Lobbyland is a large economy trading freely in the world marketplace. However, the automobile industry has been recently lobbying the government to implement a tariff on automobile imports. The government is considering the tariff proposal for future implementation. You have been appointed by the government to analyse the potential welfare impact of the tariff in case the government decided to implement it.

To conduct this task please consider the following information:

• If Lobbyland was in autarky the domestic equilibrium price of a car would be $40.
• Lobbyland is open to free trade, so Lobbyland consumers currently pay the world price of cars, which is $20.
• The specific tariff proposed by the automobile industry is $10 per car imported. However, based on estimations, the domestic price of cars after implementing the tariff would only increase to $25. This is because Lobbyland is a large economy. The implementation of the tariff would affect international prices of cars, reducing the original world price to $15.
• Current domestic supply of cars at free-trade price of $20 is 100 cars, while the domestic demand is 650 cars.
• If the tariff was implemented, domestic supply at the new domestic price of $25 (new world price of $15 plus the tariff $10) would increase to 150 cars, while the domestic demand after tariff would decrease to 600 cars.

1. Draw a graph that represents the Lobbyland market of cars (price and quantity of cars on the vertical and horizontal axes, respectively). Assume that the supply and demand curves are linear and that they start at the vertical axis (at quantity equal zero). Clearly label all the curves you draw, and indicate the world price before and after tariff, the domestic price after tariff, and the respective quantities supplied and demanded at Lobbyland before and after tariff.

2. What is the impact of the tariff on producer surplus? Provide a numerical value corresponding to the loss or gain in surplus, and clearly label the area corresponding to the change in producer surplus in the graph drawn in point (a).

3. What is the impact of the tariff on consumer surplus? Provide a numerical value corresponding to the loss or gain in surplus, and clearly label the area corresponding to the change in consumer surplus in the graph drawn in point (a).

4. What is the impact of the tariff on government revenue? Provide a numerical value corresponding to the loss or gain in revenue, and clearly label the area corresponding to the change in government revenue in the graph drawn in point a).

5. Is the country better off or worse off after the tariff is implemented? Provide a numerical value corresponding to the loss or gain in overall welfare.

If Lobbyland was a small economy with no influence over international prices, would it be possible for the country to achieve an overall welfare result similar to the result you obtained in point (e), after implementing the tariff? Briefly explain.