Trade Policies and Import Protection

1.Consider the (mythical!) country of “Developia,” which protects its rice farmers using an import quota. Answer all parts of this question based on the attached Figure below.

a.What is the quantity of rice imports allowed under the quota? What is the price of rice per ton with the quota? What would the price be and how much would be imported with free trade? Also identify the quantities of rice produced [supplied] and consumed [demanded] with the quota vs. free trade.

i.How would your answer to this part change if the import licenses were allocated via an auction?

ii.Alternatively, if the licenses were given out based on corruption (bribes to govern- ment officials)?

c.If the government wanted to give the same amount of protection to Developian rice producers using a tariff instead of the quota, what would be the tariff rate (in $/ton and also as a percentage)? How would this differ from a quota in terms of the welfare effects (gains and losses)?

d.Suppose the rice farmers in Developia are very poor peasants. What would be an alternative way for the government to help the poor rice farmers instead of using trade protection (tariff or quota)? HINT: Analyze how the government could use a subsidy for rice production—what would be the costs and benefits, compared with a tariff or quota? Why might the government prefer to keep the protection in place, in spite of the advantages of a subsidy?

e.“Thinking outside the box” question (you should draw a graph, but no exact numbers or calculations are required): Suppose that the Developian economy grows, and as a result its demand for rice increases (HINT: the demand curve shifts to the right!). What would happen to the quantity of rice imported and to the price of rice under a quota vs. a tariff? How does this difference explain why tariffs are often preferred to quotas?