Explain what you have drawn and explain what the welfare effects are of opening up to trade.

Economic and Legal Integration of Europe
Homework Exercise
Module 1 – Economics
The benefits of integrated markets
Literature:
– Neal 2007, 3
Background readings on basics of Welfare analysis:
– Mankiw, Ch. 4, 7, 9 from Essentials of Economics
Lecture:
– L.E1a: What is European Economics?
– L.E1b: Economics of Customs Union
– L.E1c: Completing the Internal Market
In this module’s tutorial we will take a closer look at welfare theory, by using a simple market model
– the most basic tool in the economist’s toolbox.
We will apply welfare theory to analyse the benefits of integrated markets. Prepare yourself for your
tutorial by providing an answer to the following questions (some involve the drawing of a graph):
1. Draw a domestic market diagram for an agricultural market (eg. milk or butter) by drawing
demand and supply curves. (Draw by hand and take a picture to include it in your
assignment; or use an (online) application.) Make sure you name the axes and curves
correctly. Draw the equilibrium, and highlight the consumer surplus and producer surplus
(their ‘welfare’);
2. Explain what do the consumer surplus and producer surplus represent in this diagram?
Explain why an equilibrium price and -quantity would come about, and explain whether the
equilibrium is ‘beneficial’ or ‘good’ according to you;
3. Suppose the domestic market is opening up to trade on the world market, where the price of
the agricultural good is much higher. Draw a new graph in which you show what happens to
the price, quantities consumed, produced and imported, and to consumer and producer
surplus. Explain what you have drawn and explain what the welfare effects are of opening up
to trade. Is opening up to trade ‘beneficial’ or ‘good’ for this country? Why, or why not?;
4. Suppose the home country is one of the Member States of the EU. Prior to Brexit, this
Member State was a net importer of beef from the United Kingdom (UK). Imagine the EU
and the UK had not succeeded in striking a Trade Agreement (a so-called ‘No Deal’) and the
EU would have to be forced to impose a tariff of 40% on beef imports from outside the
Union, following WTO rules.
Draw a new graph depicting this Member State’s situation. Make sure to include the Price-
UK for beef in your diagram and draw Price-UK+Tariff. What are the welfare effects of the
imposition of the tariff? How does this affect beef consumption in the Member State? And
explain who would be benefiting and who would be suffering from the No Deal
arrangement?
5. Explain whether you think this Member State would be better off with the trade agreement
that was ultimately signed between the EU and the UK: which is the creation of a Free Trade
Area (FTA) between the UK and the EU? What are the differences between a Free Trade
Area (FTA) and a Customs Union (CU)? What arguments for and against the FTA
arrangement with the UK could you come up with?

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