Problem
Using the example in Question 1, how does an equivalent subsidy to the import-competing producer affect the market? What is the cost to the government of this subsidy? Which policy would consumers prefer, the tariff or a subsidy?
Question 1
Suppose that the free-trade price of a good is $12 and a 10 percent ad valorem tariff is put in place. As a result, domestic production in a small country rises from 2,000 units to 2,300 units and imports fall from 600 units to 200 units. Who are the winners and losers? What is the size of their gains and losses? What is the net effect on society?