Textbook Problem

China is a major producer of grains, such as wheat, corn, and rice. Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports.

a. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions.

b. How does an export tax affect domestic grain prices?

c. How does it affect the welfare of domestic consumers, the welfare of domestic producers, and government revenue?

d. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?