Microsoft Word - chapter 12b_2021
1
AEEC 501
Fall 2021
Chapter 12, part 2
Passed out Tuesday, November 16
Due Tuesday, Nov 30
Welfare Gains from Trade and Trade Policy
1 The demand for bottled water in Addis Ababa Ethiopia in 2020 is given by
P = 10.00 ‐ 0.002 * Q
where price (P) is measured in dollars per liter, and quantity (Q) is measured in 1000s of liters
per year supplied to the City’s water customers. Water supply and sanitation there is the lowest
in the world.
See https:
en.wikipedia.org/wiki/Water_supply_and_sanitation_in_Ethiopia
The supply of bottled water by local suppliers is given by:
P = 2.00 + 0.002 * Q,
with the same units. That supply schedule means that the most efficient local suppliers can
ottle, distribute, and sell it at a price of $2.00 per liter, with higher cost producers needing a
higher price to secure enough profit to willingly supply anything.
a. You have the good fortune of calculating the domestic equili
ium price and quantity for
Addis’ bottled water market, measured in price ($US) and in Q (1000s of liters).
. Next, suppose that through technical advance, bottled water could be imported at a world
price of $1.00 per liter, much cheaper than the domestic equili
ium price. This is cheaper
than the cost of even the most efficient domestic supplier of bottled water. Domestic
“utility supplied” water is essentially zero.
If trade is unrestricted, what is the new market equili
ium? How much bottled water will
e imported with no import restrictions? What are the welfare gains resulting from
introduced access to these cheap imports, and how are they distributed among producers
and consumers?
c. Next, suppose domestic bottled water producers use the ‘infant industry’ argument,
described at https:
en.wikipedia.org/wiki/Infant_industry_argument to get a $4 tariff
imposed to protect livelihoods of hard working honest emerging local suppliers of Ethiopian
ottled water.
i. How does this tariff change the market equili
ium?
ii. How much will be collected in tariff revenues?
iii. What will be the deadweight loss from the tariff?