Question

Suppose the nation of Sugarland consists of 50,000 households, 10 of whom are sugar producers. Arguing that the sugar industry is vital to the national economy, sugar producers propose an import tariff. The loss in consumer surplus due to the tariff will be $100,000 per year. The total gain in producer surplus will be $25,000 per year.
(1) What is the gross cost per household per year of the proposed policy?
(2) What is the policy's benefit per sugar producer per year?

Answer 1

Answer:

a) The gross cost per household per year of this policy is $2 per household.

b) The policy's benefit per sugar producer per year is $2,500 per producer.

Explanation:

This tariff policy affects households, that loss consumer surplus, and sugar producers, which have a producer surplus gain.

The loss in consumer surplus due to the tariff will be $100,000 per year.

If there are 50,000 households in Sugarland, the cost per household is:

$Cost \,per\,household=Consumer\,surplus \,loss/Number\,of\,households\\Cost \,per\,household=100,000/50,000= \ 2/household$

The gross cost per household per year of this policy is $2 per household.

The benefit per sugar produced can be calculated as the total benefit per year (producer surplus) divided by the total amount of sugar producers:

$Benefit \,per\,sugar\,producer=Producer\,surplus\,gain/Producers\\\\Benefit \,per\,sugar\,producer=25,000/10=\ 2,500/producer$

The policy's benefit per sugar producer per year is $2,500 per producer.