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The Economic Impact of Price Ceilings and Trade Policies on Welfare

This analysis explores the implications of price ceilings, trade restrictions, and tariffs on market welfare within the context of a small economy. It delves into the dynamics of supply and demand, examining the effects of external factors such as natural disasters on gas prices. The examination includes a comparative analysis of social marginal costs, consumer and producer surpluses, and the outcomes of opening or restricting trade on both importing and exporting nations. Key aspects of the water-diamond paradox and implications of socialism in economic structure are discussed.

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The Economic Impact of Price Ceilings and Trade Policies on Welfare

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Presentation Transcript

  1. Price Ceiling P S A P1 B C P D E P0 F D Qs Q Qd Q

  2. Welfare Computation

  3. A Hurricane and the Price of Gas S’ P S P0+ cost in time P1 P0 D Q2 Q1 Q0 Q

  4. A Hurricane and the Price of Gas S’ P S P1=P0+cost in time P0 D Q1 Q0 Q

  5. Cost of Robbery Social Marginal Cost $ per robbery R$ B A Q Quantity (robberies)

  6. Water-Diamond ParadoxValue Vs Price P P Pd Pw Q Q

  7. Effect of Trade on Welfare • Should the government impose restrictions to commerce (imports and/or exports)? • Who would win and who would lose? • Would the gains exceed the looses?

  8. Opening the economy in an exporting country P Small Country Assumption S Consumer’s Surplus PW P Producer’s Surplus D Qd Q Qs Q Exports

  9. Opening the economy in an importing country P S Consumer’s Surplus P PW Producer’s Surplus D Qs Q Qd Q Imports

  10. Tariff on imported cameras when there exists a domestic industrySmall Country Assumption P S A B P0+$500 C E F D P0 G D Q Qo Q’o Q’1 Q1

  11. Import Quota(limit on quantity of imports) P Domestic Supply Domestic Supply +Imports quota A B Price after quota C E G D F World price H D quota Q Qo Q’o Q’1 Q1

  12. Effect of Trade on Welfare • Should the government impose restrictions to commerce (imports and/or exports)? • Who would win and who would lose? • Would the gains exceed the looses?

  13. Tariff on Imported CamerasSmall Country Assumption-no domestic industry P A P0+$500 S’ B C S P0 D Q Q1 Qo

  14. Tariff on Imported CamerasBig Country-no domestic industry P S’ International Supply S A P1 B C D P0 E+F< or > D E F D Q1 Qo Q

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