Perform a cost-benefit analysis of the following industrial policy. Assume the demand curve for cars in United States is Q=90-P, and the supply curve of cars is Q=2*P. The following question 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.
Assume U.S. is an open economy, and the world price of cars is $0.
Without government intervention, U.S. could import car at world price. Calculate CS, PS, and GS in this case.
If government imposed a tariff of $10, calculate CS, PS, GS, and DWL.
Given the existence of DWL, what explains the widespread use of import substitution industrialization (ISI) policies?
How would you draw the graph for this problem?