According to the free trade agreement, Australia exports while Canada imports beef.
Australia implementing this export subsidy will cause an increase in the price of the good on its domestic markets and a consequent decrease in the price in the rest of the world. A price increase will lead to the quantity of beef produced to increase because of the favourable export subsidy. However, the quantity of beef demanded in domestic markets will reduce because of an increase in prices of beef which will cause a reduction in sales and government revenue. Moreover, the quantity of beef exported will increase due to lowered costs of exporting beef to Canada.
The supply and demand curves for both Canada and Australia in the diagram below. P2 represents the free trade equilibrium price. At this price, the excess demand for beef from Canada will equal the excess supply of beef from Australia. The quantity of both the imports and exports between the two countries is shown by the red line on each countries diagram below. This line represents the horizontal distance between the demand and supply curves at the free trade price. The export subsidy implemented by Australia results in an increase in consumer surplus in Canada while reducing consumer surplus in their country due to increases in price. They also cause producer surpluses to reduce in Canada due to low prices of beef while increasing producer surpluses in Australia due to the increased price (Morgan, p. 276). Additionally, the export subsidy has no effect on government revenue in Canada though it has a negative effect in Australia.
If Canada imposed an import quota on Australian beef, it would influence consumer prices and quantity in both countries.
The free trade quantity of imports and exports in both countries is shown by the red line in each diagram. This line represents the horizontal distance between the demand curve and the supply curve at the set free trade price. If Canada implements a binding quota then it is set the same as the length of the blue line. This represents the horizontal distance between the demand and supply curves either at a higher import price or the lower the export price. When a new equilibrium has achieved the price in Canada is seen to rise to the level which import demand of beef is equal to the quota level. The price of Beef in Australia is seen to reduce until the export supply of beef is equal to the quota level. Canada imposing import quota on beef from Australia will then lead to a decrease in consumer surplus in Canada while causing an increase in Australia. This is mainly because beef from Australia will be expensive to import and thus will be expensive for consumers to buy thus low demand. The import quota will lead to an increase in producer surplus in Canada and a decrease in Australia. The decrease in producer surplus in Australia will be because of a fall in price. Quota rents in Canada will also increase though they will remain unchanged in Australia if the import quota is imposed.
Trade restrictions help with job preservation. This is mainly because trade allows consumers to buy products at low prices which further allows them to buy more of these products and services. Since most of these products and services will be domestically produced, an increase in purchasing power for consumers results leading to job creation both domestically and internationally for those who go to sell and market this products and services. Moreover, developing countries with low wages end up becoming richer thus allowing them to purchase more exports from developed countries.
Trade restrictions also help preserve national security. This is mainly because all local businesses are expected to be protected for national security against foreigners if local businesses are to prosper. Moreover, delicate tasks like manufacturing bombs or printing domestic currency should not be outsourced. However, in most cases, foreign businesses help increase competition of goods thus improving both in quantity and quality as consumers get value for their money. Therefore, trade restrictions can help boost national security in most but not all industries (Baumol & Blinder, p. 78).
2. An increase tax rate on alcopops in Australia is meant to help with the removal of negative externalities imposed on the society by the users. This aggressive imposing of tax on alcopops is meant to reduce the purchasing power of youths in buying these drinks and discouraging them in general. Moreover, positive externalities are present when the marginal social benefit of production and consumption is more than the marginal private benefit. Therefore, imposing higher tax rates on alcopops is meant to reduce sales and therefore government revenue thus proves effective in increasing the marginal social benefit and consequently reducing the marginal private benefits of those who produce alcopops.
According to the diagram, the imposing of tax rates on alcopops affects both the supply and demand of alcopops as a result of negative externalities. In the diagram, social benefits increase due to increase in costs which leads to the decreased demand. This will result in the reduction of drunk youths since alcopops will prove too expensive to afford. Therefore, imposing high taxes on products helps remove negative externalities which can help increase social efficiency which will ultimately result to increase in government revenue.
Sales tax is always as a result of the consumer who consumes the product. Increase in prices in the amount of sales tax increases the prices of the products thus meaning that the ultimate brunt of the increase in tax is bared by the consumers. This is because whenever sales tax is levied on any product then the suppliers end up supplying the product with their costs including the increase in sales tax thus increase in price which is bared by the consumer (Morgan, p.367). Thus, consumers end up paying more for the attainment of alcopops while suppliers continue enjoying the same amount of profits.
Most research points to imposing of high rates of tax on alcopop and alcohol-related products as being one of the most effective ways of dealing with binge drinking problems. However, most of these drinking habits are as a result of peer pressure amongst youths, therefore, information should be disseminated to sensitize the youth on the effect of alcohol. This should mean that the government and all stakeholders involved should invest in Alcohol Education and Treatment and rehabilitation programs that help disseminate this information. Once the youth are sensitized coupled with other measures like the imposition of the tax, then negative externalities like alcohol abuse can be reduced and avoided.
Reference
Baumol, W.J., and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.
Morgan, W., 2017. Introduction to microeconomics.
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