Welfare effects of Free Trade + Protectionism

Question 1

Welfare definition

Answer 1

Combined consumer and producer surpluses

• Social / Total Welfare = Consumer Surplus (CS) + Producer Surplus (PS)

Question 2

What does deadweight welfare loss mean?

Answer 2

Welfare that is lost to society as a whole as a result of enabling less efficient domestic firms in the market

Question 4

Arguments for protectionism (8)

Answer 4

• Protect declining industries
• Protect infant industries
• Health ad Safety Standards
• Human Rights reasons
• Environmental reasons
• Protect strategically important industries
• Retaliation against unfair trade practices
• Political reasons e.g. North Korea or Russia

Question 5

Explain protecting declining industries as an argument for protectionism?

Answer 5

e.g. Agriculture and manufacturing in HIC (high income countries).
–> Reduce structural unemployment caused by occupational and geographic immobilities
–> this assumed perfect mobility for factors of production.

Question 6

Explain protecting infant industries as an argument for protectionism?

Answer 6

e.g. new, small, inefficient industries (in LIC).
–> help transition away from primary product dependency
–> Long-run benefits

Question 7

Explain Retaliation against unfair trade practices as an argument for protectionism?

Answer 7

e.g. Against China providing subsidies to reduce cots (Samsung or Hyundai)
–> China intellectual property right theft / copyright

Question 8

What are methods of Protectionism (3 main + 4 others)

Answer 8

• Tariffs e.g. tax
• Quotas e.g. Physical restriction of quantities
• Subsidies e.g. Gov gives grants to reduce cost of production
• Bureaucratic barriers
• Health and Safety Standards
• Human Rights Standards
• Environmental Standards

Question 9

Draw a free trade diagram (including producer surplus and net welfare gain)

Question 10

List the (5) cons of free trade?

Answer 10

i) Imports rise
–> (withdrawal↑)
–> C.A. worsens
ii) Producer Surplus lower
–> make less profit
iii) Structural unemployment
–> due to occupational immobility
–> Gov welfare spending↑
iv) increased welfare spending
v) Social problems

Question 11

Draw the welfare effects of an import tariffs

Question 12

List the welfare effects of a Subsidy on each party ?

Answer 12

• Consumers
  –> no effect, P stays same, Q stays same, C.S. same
• Domestic Producers
  –> Higher P, Produce greater Q, P.S.↑
• Foreign producers
  –> Revenues falls
• Taxpayers and government
  –> Cost of subsidy to taxpayers
• Total welfare
  –> Total cost of subsidy, greater than total increase in producer surplus. Total welfare loss created by subsidy.

Question 13

Draw diagram showing welfare effects of a subsidy?

Question 14

Draw diagram showing welfare effects of an Import Quota?

Answer 14

Import Quota Q1Q3
Equilibrium moves from Q2–>Q4
P↑ from Pw–>Pq
Consumer Surplus↓ from dePw–>dfPq
Producer Surplus↑ from Pwab -> Pqac
OG Domestic output 0Q1
New Domestic output = 0Q1 +Q3Q4
Box 1 to Producers
Box 2 to foreign producers
Box 3+4 deadweight loss

Question 15

Draw subsidy diagram