Answer to Question #221674 in Economics for Meher

Question

The village of Hum in Croatia has a market for shoes which buyers and sellers get together to determine the price of shoes. The regional price for shoes is above the village price and shoes are a tradable. 

1.    Using simple diagrams and proper labels show this situation, and the resulting consumer and producer surplus.

2.    Show, with proper labeling (all prices and quantities should be clearly marked), on separate graphs below, what happens when transaction costs cause shoes to be a non-tradable.

3.    What is the resulting producer surplus, consumer surplus, and deadweight loss ?

4.    Name two development projects/policies that could result in eliminating this deadweight loss and briefly why they would eliminate this loss.

Answer 1

1. If the regional price for shoes is above the village price and shoes are a tradable, then the resulting consumer surplus will be higher and producer surplus will be lower.

2. If the transaction costs cause shoes to be a non-tradable, then the trade will decrease, and both consumer and producer surplus will decrease.

3. The resulting producer surplus and consumer surplus will decrease, and the deadweight loss will occur.

4. The possible solutions are either to decrease transaction costs, or to implenent subsidies for producers.