What would the optimal tariff be?

Suppose the supply S and demand D curves for a particular commodity are given by Show more Suppose the supply S and demand D curves for a particular commodity are given by S = 20P + 40 and D = 800 10P In addition assume that each unit of production of this commodity yields a social benefit of 20 and that the country is too small to affect the world price which is 20. a. Calculate the total effect on welfare of a tariff of 10%. b. Calculate the total effect on welfare of a subsidy to production of 10%. c. What would the optimal tariff be? What would the optimal subsidy be? Which policy intervention tariff or subsidy would you recommend and why? Show less

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