Assume the United States is an importer of televisions and...

Assume the United States is an importer of televisions and there are no trade restrictions. U.S. consumers buy 1 million televisions per year, of which 400,000 are produced domestically and 600,000 are imported. a. Suppose that a technological advance among Japanese television manufacturers causes the world price of televisions to fall by \$100. Draw a graph to show how this change affects the welfare of U.S. consumers and U.S. producers and how it affects total surplus in the United States. b. After the fall in price, consumers buy 1.2 million televisions, of which 200,000 are produced domestically and 1 million are imported. Calculate the change in consumer surplus, producer surplus, and total surplus from the price reduction. c. If the government responded by putting a \$100 tariff on imported televisions, what would this do? Calculate the revenue that would be raised and the deadweight loss. Would it be a good policy from the standpoint of U.S. welfare? Who might support the policy? d. Suppose that the fall in price is attributable not to technological advance but to a \$100 per television subsidy from the Japanese government to Japanese industry. How would this affect your analysis?

Assume the United States is an importer of televisions and there are no trade restrictions. U.S. consumers buy 1 million televisions per year, of which 400,000 are produced domestically and 600,000 are imported.
a. Suppose that a technological advance among Japanese television manufacturers causes the world price of televisions to fall by \$100. Draw a graph to show how this change affects the welfare of U.S. consumers and U.S. producers and how it affects total surplus in the United States.
b. After the fall in price, consumers buy 1.2 million televisions, of which 200,000 are produced domestically and 1 million are imported. Calculate the change in consumer surplus, producer surplus, and total surplus from the price reduction.
c. If the government responded by putting a \$100 tariff on imported televisions, what would this do? Calculate the revenue that would be raised and the deadweight loss. Would it be a good policy from the standpoint of U.S. welfare? Who might support the policy? d. Suppose that the fall in price is attributable not to technological advance but to a \$100 per television subsidy from the Japanese government to Japanese industry. How would this affect your analysis?

Key Concepts

Deadweight Loss

Deadweight loss refers to the loss in total surplus that occurs when a market is not operating in its most efficient equilibrium due to distortions such as taxes, tariffs, or subsidies. In the context of trade, when a tariff is imposed, the resulting inefficiencies cause part of the potential gains from trade to be lost, harming overall economic welfare. This concept is central in evaluating the cost of policy interventions that deviate from free trade conditions.

Subsidy

A subsidy is a form of financial assistance provided by a government to support a particular industry or activity, lowering production costs and effectively reducing the price of the final product. When applied in an international trade context, subsidies can mimic the effects of technological improvements by reducing prices; however, they usually constitute a transfer of resources and can distort trade. Analyzing the impact of subsidies requires distinguishing between the gains from improved production efficiency and the potential distortions in trade and welfare.

Tariff

A tariff is a tax imposed on imported goods which raises the domestic price of those goods relative to the world price. Tariffs are used by governments to protect domestic industries and generate revenue. However, they typically lead to a reduction in consumer surplus and can create inefficiencies in the market, resulting in deadweight loss. Understanding tariffs is essential for analyzing how trade policies affect market outcomes and overall social welfare.

Total Surplus

Total surplus is the sum of consumer surplus and producer surplus, representing the overall welfare in an economy. It is a key measure in welfare economics because it illustrates the efficiency of the market. In the context of international trade, changes in total surplus help evaluate the net benefits or losses to society, accounting for gains of consumers, losses of domestic producers, and any inefficiencies introduced by policy interventions such as tariffs.

Producer Surplus

Producer surplus is the difference between the market price that producers receive and the minimum price at which they are willing to produce a good. In international trade scenarios, a fall in the world price of an imported good typically lowers producer surplus for domestic producers because they receive reduced prices for their products, which may lead to decreased domestic production. This concept helps assess the welfare losses experienced by producers when market prices decline due to external competition or technological improvements abroad.

Consumer Surplus

Consumer surplus represents the difference between what consumers are willing to pay for a good and what they actually pay. In the context of international trade and price changes, a reduction in the world price of a good increases consumer surplus, as consumers pay less for each unit purchased and often consume more. This concept is crucial for measuring the welfare benefits to consumers when market conditions change or trade policies are adjusted.

Transcript

00:01 When a technological advance lowers the world price of televisions, the effect on united states, an importer of tv, can be shown in this figure.

00:18 Initially, the world price of tv is p1.

00:22 Consumer surplus is a plus b.

00:32 Producer surplus is c plus g.

00:45 Um, g should be here.

00:52 Total surplus is a plus b plus c plus g.

01:00 So total surplus is the sum of consumer surplus and producer surplus.

01:09 The initial level of imports is shown as i am sub 1.

01:33 So after the improvement in technology, the world price of television declines to p2, which is p1 minus 100.

02:03 Consumer surplus increases by d plus e plus f.

02:17 Producers surplus declines by c.

02:26 Total surplus rises by d plus e plus f.

02:57 Okay, so consumer surplus must increase by the sum of c to f.