Cement is competitively produced domestically with MC = Q/3 -20. Domestic demand for cement is P = 100 - Q/3. The world price for cement is $50.
a. Find and graph the free trade equilibrium in this market
b. The production of cement has a marginal external cost of $50. Add the social marginal cost to your graph and find the socially optimal quantity and price.
c. If the government imposes a specific tax of $50 on production, how much will be produced domestically? What happens to the pattern of trade? Mark on your graph the changes to CS, PS and externality costs.
d. If the government did not want to apply such high tax on production, what trade policy can it use to restrict domestic production in this context? Can this policy obtain the socially optimal outcome? Why or why not?