Concerning international dumping, distinguish
between the price- and cost-based definitions
of foreign market value.
Table 5.7 illustrates the demand and supply
schedules for television sets in Venezuela, a
“small” nation that is unable to affect world
prices. On graph paper, sketch Venezuela’s
demand and supply schedules of television sets.
a. Suppose Venezuela imports TV sets at a price
of $150 each. Under free trade, how many sets
does Venezuela produce, consume, and
import? Determine Venezuela’s consumer
surplus and producer surplus.
b. Assume that Venezuela imposes a quota that
limits imports to 300 TV sets. Determine the
quota-induced price increase and the resulting
decrease in consumer surplus. Calculate the
quota’s redistributive, consumption, protective, and revenue effects. Assuming that
Venezuelan import companies organize as
buyers and bargain favorably with competitive foreign exporters, what is the overall welfare loss to Venezuela as a result of the quota?
Suppose that foreign exporters organize as a
monopoly seller. What is the overall welfare
loss to Venezuela as a result of the quota?
c. Suppose that, instead of a quota, Venezuela
grants its import-competing producers a subsidy of $100 per TV set. In your diagram,
draw the subsidy-adjusted supply schedule
for Venezuelan producers. Does the subsidy
result in a rise in the price of TV sets above
the free-trade level? Determine Venezuela’s
production, consumption, and imports of
TV sets under the subsidy. What is the total
cost of the subsidy to the Venezuelan government? Of this amount, how much is transferred to Venezuelan producers in the form
of a producer surplus, and how much is
absorbed by higher production costs due to
inefficient domestic production? Determine
the overall welfare loss to Venezuela under
the subsidy.