Answer to Question #168210 in Microeconomics for radhika gupta

Question

The government opens the handicraft market for international trade. Assume the world price 𝑃𝑤is higher than the domestic equilibrium price. Discuss the gains and losses in the welfare of economic participants from this policy

Answer 1

Gains

i) There will be export of the excess supply to maximise producer surplus since they will be willing to earn more profits.

ii) The foreign consumers will enjoy the handicrafts since they will be in plenty for them since they have been imported in large quantities.

Losses

ii) The losers are the domestic consumers as they now consume less at a higher price since the price will have been set higher.

ii) The domestic consumers won't enjoy the handicrafts since most producers would prefer to import them so as to earn more cash.