The Effects of Free Trade on Consumer and Producer Surplus
What happens when a nation opens its markets to free trade?
Assume you live in a nation that produces only one good - tomatoes. The producers in the nation where you live do not have a comparative advantage in the production of tomatoes. When your nation opens its markets to free trade, what would be the expected outcomes?
1. The consumer surplus you experience from eating tomatoes will decrease.
2. The consumer surplus you experience from eating tomatoes will not change.
3. You will eat fewer tomatoes.
4. Producers of tomatoes in your nation will see their producer surplus fall.
Answer:
When a nation opens its markets to free trade, the consumer surplus you experience from eating tomatoes will decrease, and producers of tomatoes in your nation will see their producer surplus fall.
When a nation opens its markets to free trade, it allows for the import and export of goods without restrictions. In the given scenario, the nation produces only one good - tomatoes - and does not have a comparative advantage in tomato production. Comparative advantage refers to a country's ability to produce a good at a lower opportunity cost compared to other countries.
When the nation opens its markets to free trade, it means that tomatoes can be imported from other countries where they can be produced more efficiently and at a lower cost. This increased competition from imported tomatoes can lead to changes in consumer and producer surplus.
1. The consumer surplus you experience from eating tomatoes will decrease: With the availability of imported tomatoes, consumers have more options to choose from. This increased competition can lead to lower prices for tomatoes, reducing the consumer surplus. Consumers may still enjoy tomatoes, but at a lower cost.
2. The consumer surplus you experience from eating tomatoes will not change: This option is unlikely because the introduction of imported tomatoes is expected to affect the consumer surplus.
3. You will eat fewer tomatoes: This option is also unlikely as the opening of markets to free trade increases the availability of tomatoes, both domestically produced and imported.
4. Producers of tomatoes in your nation will see their producer surplus fall: Since the nation does not have a comparative advantage in tomato production, the introduction of imported tomatoes can lead to increased competition for domestic producers. This increased competition can result in lower prices for domestically produced tomatoes, reducing the producer surplus.