Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 9 - Part III - Application: International Trade - Problems and Applications - Page 191: 6

Answer

a) Please see the graph. b) The tax decreases the price of domestic grain. c) Consumers and the government are better off, and producers are made worse off. d) Total welfare in China decreases.

Work Step by Step

a) The graph shows that the price decreases for grains if there is a tax on exports. c) Consumer surplus increases from $A$ to $A+B$. Producer surplus decreases from the sum of areas $B+C+D+E+F+G$ to the sum of areas $F+G$. Government revenue increases from zero to $D$. d) Before the tax, total surplus was the sum of areas $A+B+C+D+E+F+G$. After the tax, total surplus (and government revenue) was the sum of areas $A+B+D+F+G$. The deadweight loss is the sum of areas $C+E$, so total welfare in China decreases.
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