A small country can import a good at a world price of 10 per unit. The domestic supply curve of the good is
S = 20 + 10P
The demand curve is
D = 400 - 5P
In addition, each unit of production yields a marginal social benefit of 10.
a. Calculate the total effect on welfare of a tariff of 5 per unit levied on imports.
b. Calculate the total effect of a production subsidy of 5 per unit.
c. Why does the production subsidy produce a greater gain in welfare than the tariff?
d. What would the optimal production subsidy be?