Assume the demand curve for car in the U.S. is Q=90-P, and the supply curve of car in U.S. is Q=2*p. The following questions would require the calculation of consumer surplus (CS), producer surplus (PS), government surplus (GS), and deadweight loss (DWL). Here DWL is the change of social welfare after government adopted a certain policy.
1) Now assume that U.S. is a closed economy.
a) Without any government intervention, calculate the CS, PS, and GS.
b) If government imposed a tax of $30 for each car, calculate CS, PS, GS, and DWL.
c) If government subsidized $30 for each car, calculate CS, PS, GS, and DWL.
2) Now assume U.S. is an open economy, and the world price of car is $0.
a) Without government intervention, U.S. could import car at world price. Calculate CS, PS, and GS in this case.
b) If government imposed a tariff of $10, calculate CS, PS, GS, and DWL.
c) Given the existence of DWL, what explains the widespread use of ISI policies?