The free trade consumption point is outside of the production possibility curve. With no distortion of domestic producer and consumer decisions, there are no triangles of inefficiency. The country gains from trade—its consumption point is outside of its production capabilities and it reaches a higher community indifference curve. This can occur in any of several extreme cases. The Uruguay Round agreements include a provision to eliminate the use of VERs, but it has not been fully effective. With a production subsidy instead of a tariff, the market price remains at P0.
Overall, the sock exporting countries would rate the tariff as the least desirable.
Compulsory declarations, Answers problems chapter 3-11
Both the tariff and the production subsidy reduce sock import demand, so that they would tend to put downward pressure on sock export prices. Domestic producers gain producer surplus on the amount that they produce and sell, because of the increase in domestic price. This can occur in any of several extreme cases. Comparative Advantage Suggested answers to questions and problems in the textbook 2. The country gains because consumers have access to a wider variety of products. A high-price equilibrium occurs if Boeing and Airbus recognize that price competition mainly serves to depress the profits of both firms, so that they both restrain their urges to compete using low prices. The consumption effect of a tariff is the loss of consumer surplus for the units that consumers would consume with free trade but do not consume when the tariff increases the domestic price.