In the diagram in Question #8 above, suppose that country A, from this initial situation Where its tariff is applied to both countries B and C, now forms a customs union with country C. The "net welfare effect" on country A from the formation of this customs union with country C would be __________.

Question

Quizplus · Accepted Answer

When country A forms a customs union with country C, it eliminates the tariff on trade with country C. As a result, country A shifts from producing good Y to producing good X, and imports good Y from countries B and C. This leads to an increase in consumer surplus (area g) and a decrease in producer surplus (area h). There is also a trade diversion effect as country A is now importing more from country C, which leads to a deadweight loss (area d). However, the gains from the increased consumer surplus and the trade creation effect (producing more efficiently with country C) (area c) outweigh the deadweight loss. Therefore, the net welfare effect on country A is a gain of areas (a + c + d + e + g + h) minus areas (b + f).

In the Diagram in Question #8 Above, Suppose That Country