Note: * => the problem is illustrated in the "Ec311" software package of interactive exercises available on Oxy's Novell network. To access it from a campus computer, open the "Economics" folder and double-click the "Ec311" icon. Then select "The supply and demand geometry of policymaking" option from the Interactive Exercises menu and click "Continue." Once inside the program, click "Exercises" from the toolbar at the top of the screen for general instructions and sample exercises to try.
    You can also access the program from any campus computer with an ethernet connection. To do that, use MyComputer or Explore to locate and run the program: "Q:\Vbapps\Sims\Ec311.exe." (The complete name for the network Q drive is "Apps on 'Center-1\Litter-2' (Q:).")

   *1. RANKING POLICY OPTIONS: The U.S. is a small-country importer of ships.
    a. Use a domestic market diagram to depict a free-trade equilibrium.
    b. For national security purposes, the U.S. wants to increase domestic production above its free-trade level. Given that goal, rank the following policies from most to least desirable from the perspective of national welfare, and use your diagram from part a to support your answer: (1) a tariff on ship imports; (2) voluntary export restraints (VER's) with all major ship exporters; (3) a subsidy for domestic ship production.
    c. For the policy you ranked second, briefly explain why it is a second-best alternative and is therefore "like doing acupuncture with a fork."

    2. OPTIMAL POLICY RECOMMENDATIONS: The U.S. is a small-country importer of firearms. Suppose that you are a member of the U.S. International Trade Commission and that you must recommend a policy for the firearms industry. Consider separately each alternative goal below, recommend a "first-best" policy (from the perspective of national welfare) and briefly explain your recommendation (diagrams are optional):
    a. For national security purposes, it is deemed desirable to increase domestic firearms production by, say, 20 percent (the amount in each case is just suggestive--don't worry about it).
    b. For national security purposes, it is deemed desirable to permanently reduce dependency on imported firearms to 20 percent of domestic production.
    c. For street safety purposes, it is deemed desirable to decrease domestic firearms consumption by 20 percent.

     3. U.S. PROTECTION EXAMPLES: In each of the following cases, the U.S. implemented protectionist measures. From the perspective of national welfare, recommend a less costly policy for each case, and explain your recommendation briefly:
    a. In the 1980s, the U.S. auto industry obtained "temporary" protection in order to raise profits so it could afford investments to retool outdated factories.
    b. In the 1950s, the U.S. petroleum industry received protection from imports to promote an increased reserve of domestic petroleum in order to be available for national emergencies.

    4. EXPORT SUBSIDIES VERSUS PRODUCTION SUBSIDIES: Suppose that Thailand is a small-country exporter of bicycles. Thailand is trying to choose between an export subsidy and a production subsidy to increase bicycle output by, say, 20 percent. Illustrate how:
    a. The export subsidy will cause a larger welfare loss than the production subsidy; and
    b. The production subsidy will have a larger budget cost for the Thai government.
    c. U.S. trade law protects domestic producers from injury caused by two types of foreign dumping: selling exports to the U.S. at a price (1) below the price charged in the country of origin, or (2) below the cost of production in the country of origin. Which of the two subsidy options will result in type (1) dumping? Type (2) dumping? Explain briefly.

    *5. TAXES IN AN OPEN ECONOMY. Consider a small-country importer of wine. Use a domestic market diagram to demonstrate how sellers tend to pay the full amount of a production tax on wine while buyers tend to pay the full amount of a consumption tax on wine.

    *6. DUMPING: Suppose the U.S. is a small-country importer of frozen concentrated orange juice (FCOJ). Sorry about the long product name; this is based on a true story.
    a. Use a domestic market diagram to depict an initial free trade equilibrium.
    b. Suppose exporters implement an export subsidy. Depict the impact on the U.S.
    c. U.S. trade law permits retaliation in the form of antidumping duties which are set equal to the size of the estimated 'dumping margin,' in this case, the difference between the prices paid by U.S. buyers before and after the export subsidy. Depict the consequences of an antidumping duty implemented in the FCOJ market by the U.S.
    d. Rank the following FCOJ alternatives from best to worst from the perspective of U.S. national welfare: (1) free trade; (2) dumping by foreign suppliers; and (3) dumping by foreign suppliers plus antidumping duties by the U.S. Briefly explain your ranking, using your diagram for support.

    7. THE PUBLIC CHOICE THEORY OF PROTECTIONISM: Use public choice theory to account for each of the following in a sentence or two:
    a. Why surveys indicate that the majority of the U.S. public favors increased protectionism even though the costs to U.S. consumers of the country's protectionist policies exceed $30 billion per year.
    b. Why politicians tend to prefer trade protection to production subsidies.
    c. Why the costs of protection may be closer to the entire consumer costs of the protection rather than just the conventional efficiency losses.

    8. TRADE LIBERALIZATION: Consider China as a small-country importer. From 1992 to 1997, China reduced its (weighted average) tariff rate on imports from 40.9 percent to 28.9 percent. Illustrate in a domestic market diagram the change in China's national welfare from its tariff reduction.

    9. CUSTOMS UNIONS: Consider the North American Free Trade Agreement (NAFTA). Based on customs union analysis, does NAFTA necessarily raise the national welfare of Mexico compared to its situation before NAFTA? Support your answer with a domestic market supply and demand diagram for an item that Mexico imports (as a small-country importer).

    10. RESOURCE MIGRATION: Consider the possibility of LABOR migration between two large countries, one a developed country (DC) and the other a lesser developed country (LDC). Assume that the endowment of labor for each country is perfectly inelastic and that all output requires both labor and capital to produce.
    a. Use a diagram for the labor market similar to the resource-migration diagram we used in class to depict the pre-migration situation.
    b. Indicate the consequences of some labor migration (but not enough to equate wages in the two countries). Indicate the gains or losses for each country, as well as the gains or losses for the labor and capital belonging to each country. (Assume that all labor retains its original citizenship.)