The counterfactual analysis (Hint: As always, although you are not instructed to draw diagrams, it is helpful to do so.) Suppose Monona is initially a small closed economy that consumes and produces carp. The domestic demand and supply curves are given by the following equations where Q is the quantity of carps and P is the dollar price per carp: Domestic demand: Q = 1000 – 2P Domestic supply: Q = 3P – 600
(a) Calculate the equilibrium price and quantity, consumer surplus, producer surplus and total surplus under autarky (that is, when Monona has a closed carp market).
Suppose Monona opens the carp market to international trade. The world price of a carp is $250.
(b) Calculate the price and quantity consumed in the domestic carp market. Would Monona import or export carp and how many units are imported or exported? What is the total surplus in the economy? Would the domestic producers favor opening the carp market to international trade?
(c) A prohibitive import tariff is a tariff such that imports are not incentivized, namely, no import occurs after such a tariff is implemented. The economy reverts to autarky equilibrium. What is the prohibitive import tariff in the market for carp in Monona? Calculate the size of the deadweight loss that results from imposition of a prohibitive import tariff.
Suppose there is no tariff or quota intervention in the market for carp in Monona, but that the market for carp in Monona is open to international trade. Furthermore, suppose that the world price of carp remains at $250/carp. Monona, if it opens this market to trade, will be able to acquire new fishery radar technology. The new radar will improve productivity and shift the domestic supply curve to:
New domestic supply curve: Q = 3P – 300
However, domestic producers are considering a campaign against the free trade policy that would open the carp market to trade. This campaign would result in the removal of the new radar technology and the economy would revert back to the equilibrium found under autarky.
(d) Is it beneficial for domestic producers to campaign against opening the carp market to international trade? Explain your answers by calculation the benefit to producers of the two policies and then comparing the two policies.