Reference no: EM132417960

Suppose the market price for solar panels in the U.S. will be $500 per panel in the absence of any trade in solar panels. The price of solar panels in the world market is $295 per panel. 

a) What will be the price of solar panels in the U.S. if the U.S. has free trade in solar panels? Diagrammatically show the gains from trade in solar panels. (Change in welfare as a result of free trade in solar panels compared to the situation of no trade. Show how the different components of welfare such as consumer surplus and producer surplus change.) 

b) Now suppose the Trump administration imposes a quota. That is, it says that it will allow the import of only 10 million panels a year (With free trade the imports would have been more than 10 million). Will the price of solar panels rise or fall in the US? Who will gain from the quota? Who will lose? Diagrammatically show the welfare impact of the quota compared to the free tradesituation. (Again show the change in welfare in terms of consumer surplus, producer surplus, government revenue etc. You can assume that the government auctions quota licenses.)

c) Now suppose that instead of imposing a quota, the Trump administration negotiates a VER (Voluntary Export Restraints) deal with China (assume for the sake of this question that China is the only exporter of solar panels to the US.) whereby China agrees to restrict the export of solar panels to 10 million panels a year. How would your results differ from that in part b? Explain and show diagrammatically the comparison between a quota and a VER in terms of its impact on domestic price, consumer surplus, producer surplus, government revenue and total welfare)