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3. As part of the proposed United States-Mexico-Canada Agreement, existing Canadian tari↵s on imported dairy products...

3. As part of the proposed United States-Mexico-Canada Agreement, existing Canadian tari↵s on imported dairy products would be lowered. To model the direction of change, assume that Canada is currently an importer of milk. It presently imposes a tari↵ on imported milk that would be fully eliminated under the proposed trading agreement. Using a diagram of supply and demand in the market for milk, identify the change in quantity of milk produced and consumed in Canada, and the change in consumer surplus and producer surplus in the market for milk.

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When there were tariffs on the diary products in Canada, the price charged to consumers is Pc while the world price is Pw. If all the bans are removed from tariffs, the price charged to consumers falls to Pw. Pre removal of tariffs, the consumer surplus is A+D while producer surplus is B+C. After removal of ban from trade, consumer surplus rises to A+D+B+E+F+G while producer surplus falls to C.

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