Tariffs Suppose the market price for solar panels in the U. will be $500 per panel in the absence of any trade in solar panels. The price of solar…

Tariffs

Suppose the market price for solar panels in the U.S. will be $500 per panel in the absence of any trade in solar panels. The price of solar panels in the world market is $295 per panel.

a) What will be the price of solar panels in the U.S. if the U.S. has free trade in solar panels? Diagrammatically show the gains from trade in solar panels. (Change in welfare as a result of free trade in solar panels compared to the situation of no trade. Show how the different components of welfare such as consumer surplus and producer surplus change.)

b) Now suppose the new Trump administration imposes a tariff of $45 on imported solar panels. What will be the new price of solar panels in the U.S.? Who will gain from the tariff? Who will lose? Diagrammatically show the welfare impact of this tariff compared to the free trade situation. (Again show the change in welfare in terms of consumer surplus, producer surplus, tariff revenue etc.)