Reference no: EM132461529

Problem: A country imports 3 billion barrels of crude oil per year and domestically produces another 3 billion barrels of crude oil per year. The world price of crude oil is $90 per barrel. Assuming linear curves, economists estimate the price elasticity of domestic supply to be 0.25 and the price elasticity of domestic demand to be 0.1 at the current equilibrium.

The reduction in the country's demand for imports may affect the world price of crude oil. Assuming that the import fee reduces the world price from $90 to $80 per barrel, and thus, the after-tax domestic price is $80 + $30 = $110 per barrel, a net increase in domestic price of $20 per barrel

Determine the quantity consumed, the quantity produced domestically, and the quantity imported after the imposition of the import fee. Then estimate the annual social benefits of the import fee

Re-estimate the social net benefits assuming that 20 percent of the increase in producer surplus is realized as tax revenue under the existing tax system, assume that increases in tax revenues less the cost of administrating the import fee are used to reduce domestic taxes.