"This question asks you to analyze the effects of removal of a tariff on imported oranges. The following table summarizes the situations in the orange market with and without the tariff. The first column describes the situation with a $4.00-per-bushel tariff on oranges. The second column represents the situation after the tariff is removed. You may assume that transportation costs are zero and that the supply and demand curves are straight lines.
With $4.00 Tariff With Free Trade
World Price of Oranges ($/Bushel) $12.00 $12.00
Tariff Per Bushel ($/Bushel) $4.00 $0.00
Domestic Price of Oranges ($/Bushel) $16.00 $12.00
Oranges consumed domestically 24 8
(million bushels/year)
Oranges produced domestically 8 6
(million bushels/year)
a. Illustrate the effects of removal of the tariff. Label the free-trade and tariff equilibria in terms of consumption, domestic production, imports, and domestic and world prices.
b. Estimate the amount domestic consumers gain from removal of the tariff. Show and explain your work.
c. Estimate the amount of the net effect on the country's welfare from removal of the tariff. Show and explain your work.
d. In this case, would the optimal import tariff on oranges be negative, zero, or positive? Why? Under what assumptions is the "optimal" tariff really optimal?