Suppose the demand in the rich country is P=100-Q and supply is P=1.5Q.

- In autarky - a closed economy where no imports or exports are possible

- Suppose now that country A can trade freely and world price = 45

- There is a negative consumption externality with a constant value of 20 for every unit consumed

Suppose that the government does not intervene in the market. Compute country A's welfare under autarky and free trade with the negative consumption externality (2 marks). Which agents (i.e., consumers and producers) in country A would advocate for free trade (over autarky) and why (1 mark)? Is country B's welfare affected by the consumption externality in B (1 mark)? Do you agree with the claim that welfare under free trade (compared to autarky) improves in both countries when a negative consumption externality is present (1 mark)? Briefly explain why (not) (1 mark)

Suppose the negative consumption externality was 5 instead of 20. Does your qualitative (not quantitative) answer about whether free trade improves welfare in both countries or not (i.e., the last two questions in Question 7) depend on the size of the externality (1 mark)? Explain why your answer is economically and politically significant (2 marks).