(Scenario: Sugar Trade in Birdonia) In autarky, suppose that equilibrium sugar price is $100 per ton in Birdonia, a small agricultural nation. Now, suppose Birdonia engages in free trade with the rest of the world. The world price of sugar is $125 per ton. What action must the government of Birdonia take to ensure that Birdonians do not import sugar at the world price of $125?
A) It must place a $25 per ton tax on Birdonian sugar exports.
B) It must levy a countervailing duty of $50 a ton on Birdonian sugar exports.
C) It must agree to voluntarily restrain its exports to $125 per ton.
D) It must levy a tariff of $50 per ton on imported sugar.

Question

Quizplus · Accepted Answer

To ensure that Birdonians do not import sugar at the world price of $125, the government of Birdonia should levy a tariff of $50 per ton on imported sugar. This would increase the price of imported sugar to $175 per ton, making it more expensive than domestically produced sugar that is still sold at the original equilibrium price of $100 per ton. This would encourage domestic production and consumption of sugar and prevent imports. Option A is incorrect because placing a tax on Birdonian sugar exports would make it less competitive in the global market and decrease exports, but this does not solve the problem of imports. Option B is incorrect because it refers to imposing a duty on Birdonian sugar exports, but the problem is with imports. Option C is incorrect because voluntary export restraints would reduce Birdonia's export revenues, but they do not solve the problem of imports.

(Scenario: Sugar Trade in Birdonia) in Autarky, Suppose That Equilibrium