The domestic demand curve, domestic supply curve, and world supply cur

The domestic demand curve, domestic supply curve, and world supply curves for a good are given in the above figure. All the curves are linear. Initially, the country allows imports. Then imports are banned.

Calculate how consumer and producer surplus change because of the ban. Is the country better off with the ban on imports? Why?

ANSWER

Consumer surplus before the ban equals .5 ∗ 75 ∗ 75 = $2812.5. Producer surplus before the ban equals .5 ∗ 25 ∗ 25 = $312.5. Total social welfare equals $3125. The consumer surplus after the ban equals .5 ∗ 50 ∗ 50 = $1250. Producer surplus equals .5 ∗ 50 ∗ 50 = $1250 after the ban. Total social welfare equals $2500. Consumer surplus has decreased by $1562.5 and producer surplus has increased by $937.5 because of the ban. Total social welfare has decreased by $635. The country is worse off because the total social welfare has decreased.