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A-Level Economics · World price above equilibrium (exports) diagram question

EVALUATION: domestic consumers pay more once this good is exported at the world price. Does that make free trade in this sector a bad deal for the country?

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The diagram

The answer

No — the producer gain exceeds the consumer loss, and the government can tax the winners to compensate the losers. There are definite winners and losers from trade, but the winners gain more than the losers lose — so compensation is possible: tax the exporters, redistribute to the losers, and in principle everyone can be made better off. On the diagram the surplus gained (GEBF) is bigger than the surplus lost, so the country is richer in total. That does not mean every household is: it is a question of how the gains are divvied up. The honest judgement is that the government CAN tax the winners and redistribute to the losers — whether it actually does is the evaluation worth writing.

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This is one of 6 questions on the world price above equilibrium (exports) diagram — every corner lettered, every wrong answer diagnosed.

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