1. Suppose a country initially in autarky liberalizes trade so that it now exports a good. The world price is 100. The economic consequences are depicted below.

A) On a separate piece of paper, identify the following:

1) Consumer surplus will fall by:_________________________
2) Net national welfare will rise by______________________
3) Total variable production costs will rise by:__________________________
4) Total export revenue for all sales will be:___________________________

B) Economists argue that the losses that arise out of reduced domestic consumption as a result of increased exports will be outweighed by the benefits of exports. Explain (9 points). Note: this is not about the overall benefits of exports but only as a result of goods formerly consumed at home and now exported.

2. Suppose a small country imposes a tariff, where P1 is the world price and P2 is the tariff-distorted domestic price.

A. On your answer sheet, identify the following:

1) Total producer surplus will rise by:___________________________

2) Net national welfare will fall by:__________________________

3) Increased producer surplus from increased domestic production:__________

4) The loss to consumers priced out of the market:___________________________

B). Identify and explain the deadweight losses of the tariff associated with increased domestic production. (Do not include the impact of losses associated with decreased domestic consumption.)

3. Suppose that small country imposes an export subsidy. The world price is PW.

A) On your answer sheet, identify the following using the appropriate final domestic price as a consequence of an export subsidy (either P2 or P3).

1) Post export subsidy quantity produced:____________________________

2) Post export subsidy quantity consumed:__________________________

3) Post export subsidy change in producer surplus (identify whether a gain or loss):______________________

4) Post export subsidy change in consumer surplus (identify whether a gain or loss):______________________

B) Identify the change in production associated with the export subsidy. Explain whether this particular effect results in an increase or decrease of domestic welfare. Be sure to include in your discussion a comparison of production costs and export revenue. (Ignore the domestic consumption effects of the export subsidy).

5. One of the first WTO dispute settlement involved the U.S. and Venezuela. For simplicity, assume that the US had imposed taxes on gasoline refiners as part of the U.S. Clear Air Act depending on their level of pollution.

• The U.S. government was willing to adjust the tax downward on any particular U.S. firm if they were able to document that they polluted less than that implied by their initial tax burden.

• All foreign gasoline refiners exporting to the U.S. faced a uniform tax. The U.S. government would not alter those charges based on any information provided by individual foreign refiners.

1) Explain what GATT principle this US policy might violate.

2) Explain how the WTO dispute settlement process would evaluate a Venezuelan complaint about U.S. policy.

3) Suppose the WTO dispute settlement body ruled against the U.S. What options would be available to Venezuela if the U.S. did not change its policy? Explain how these options affect the Venezuelan economy.