Suppose that the free-trade price of a ton of steel is €500. (Note: € is the symbol for the euro, a common currency used in 19 European countries, including Finland.) Finland, a small country, imposes a €60-per-ton specific tariff on imported steel. With the tariff, Finland produces 300,000 tons of steel and consumes 600,000 tons of steel. What will happen to the Finnish price of steel if Finnish demand for steel increases and a 300,000-ton quota remains unchanged?

Question

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With the specific tariff of €60 per ton, the price of imported steel in Finland is €560 per ton. Therefore, the domestic price of steel in Finland is also €560 per ton. If Finnish demand for steel increases, with a quota of 300,000 tons, the domestic supply will remain the same. This will lead to an increase in the price of steel in Finland, as the demand will outstrip the supply at €560 per ton. Therefore, the Finnish price of steel will increase.

Suppose That the Free-Trade Price of a Ton of Steel