1)

Explain why the Consumption and Production distortions are indeed a loss to society, and what is wrong with the logic that leads to the apparent paradox.

The two deadweight triangles associated with the graphical analysis of a tariff are the Consumption distortion and Production distortion losses. It is easy to understand why the Consumption distortion constitutes a loss for society. After all it raises the prices of goods to consumers, and even causes some consumers to drop out of the market altogether. It seems paradoxical that the Production distortion is considered an equivalent burden on society. After all, in this case, profits increase, and additional production (with its associated employment) comes on line. This would seem to be an offset rather than an addition to the burden or loss borne by society. Explain why the Production distortion is indeed a loss to society, and what is wrong with the logic that leads to the apparent paradox. [4] Answer:
The Production distortion is a loss to society because it constitutes a loss to consumer surplus, which is not recouped by any other group in society. The actual triangle here represents an inefficient shift of society’s resources to produce a good, which it could not sell profitably at world prices. The basic point here is that the country ends up producing more than it should at the free trade equilibrium
2)

The U.S. producer Boeing, and the European Airbus are contemplating the next generation mid-sized fuel efficient generation of air carrier. If both produce their respective models, then each would lose $50 million (because the world market is just not large enough to enable either to capture potential scale economies if they had to share the world market). If neither produce, then each one's net gain would of course be zero. If either one produces while the