Suppose the U.S. supply and demand curves for wheat cross at a price of $5 per bushel, but American producers can sell as much wheat as they want to on the world market at a price of $8 per bushel. Now suppose the government imposes a sales tax of $1 per bushel on all wheat sold by American producers to American consumers. Suppose also that American consumers are forbidden to buy wheat from foreigners, so all wheat sold in America must be produced in America.

1. Before and after the tax is imposed, show in a diagram the gains and losses to all

relevant groups of Americans. What is the deadweight loss due to the tax?

2. Given the existence of the tax, what is the deadweight loss due to the prohibition on

foreign wheat?