The figures given below illustrate a situation of a trade embargo. In Figure (a) D_d and S_d are the domestic demand and supply curves of the embargoing countries. The import price is P₀ and the target country imports the amount Q₀before the embargo is imposed. The embargo initiator(s) lose area _____ while the target country loses _____. A)(b + c); (a + c) B)(a + d); (b + c) C)a; b D)a; (b + c)

Question

Quizplus · Accepted Answer

The area lost by the embargo initiator(s) is given by the sum of areas b and c. Area b represents the loss of producer surplus, as domestic producers are no longer able to sell their goods to the target country. Area c represents the deadweight loss, as resources are now being used less efficiently and the total surplus of both countries has decreased. 
The target country loses area a, which represents the loss of consumer surplus as they are no longer able to import the same amount of goods at the previous import price. However, they may also gain some producer surplus as domestic producers may increase production to meet the domestic demand that was previously met through imports. The figure does not provide enough information to determine the size of this potential gain in producer surplus, but it is not necessary for answering this question.

The Figures Given Below Illustrate a Situation of a Trade