When a country that exported a particular good abandons a free-trade policy and adopts a no-trade policy, A. producer surplus decreases and total surplus decreases in the market for that good. B. producer surplus increases and total surplus decreases in the market for that good. C. producer surplus increases and total surplus increases in the market for that good. D. producer surplus decreases and total surplus increases in the market for that good.

Question

Britney Harvey

Business

18 August, 09:50

When a country that exported a particular good abandons a free-trade policy and adopts a no-trade policy, A. producer surplus decreases and total surplus decreases in the market for that good. B. producer surplus increases and total surplus decreases in the market for that good. C. producer surplus increases and total surplus increases in the market for that good. D. producer surplus decreases and total surplus increases in the market for that good.

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Demetrius Mcguire · Answer 1

A) producer surplus decreases and total surplus decreases in the market for that good.

Explanation:

When a country adopts a no trade policy, producer surplus decreases, consumer surplus increases, and total economic surplus decreases.

Total producer surplus deceases, because the quantity produced will be greater than the quantity demanded by the domestic market which will result in lower prices (which increases consumer surplus). But the extra consumer surplus is not enough to offset the lost producer surplus, therefore, the total economic surplus will decrease.

This is specially true if we are talking about small economies or large producers. E. g. due to the US - China trade war, American farmers couldn't sell their products to Chinese customers which resulted in an over stock, and a great portion of their total income was slashed.