Define the term social (community) surplus.

Calculate the social (community) surplus in the market for cotton in San Marcus.

Draw and label the new supply curve following the granting of the subsidy to domestic cotton producers on Figure 3.

Calculate the cost to the government of San Marcus of providing this subsidy to domestic cotton producers.

Calculate the resulting change in producer surplus following the introduction of the subsidy to cotton producers in San Marcus.

Calculate the change in the consumer surplus resulting from the subsidy.

Explain two reasons why the government of San Marcus may have decided to grant a subsidy to its cotton producers.

State two functions of the WTO.

Plot and label the world cotton supply curve that San Marcus now faces on Figure 3.

With reference to your answer to question (b)(ii), calculate the change in the cost of financing the $8 per kg subsidy to the government of San Marcus following the decision to import cotton from the world market.

Explain one possible advantage and one possible disadvantage for the San Marcus economy of the decision to join the WTO and slowly liberalize trade.

consumer surplus

$\frac{\left(10\times 50\right)}{2}\times 1000=250000$

producer surplus

$\frac{\left(6\times 50\right)}{2}\times 1000=150000$

social surplus
250 000 + 150 000

Any valid working is sufficient for [1].

= $400 000

OR

$\frac{\left(16\times 50\right)}{2}\times 1000$

Any valid working is sufficient for [1].

= $400 000

An answer of $400 000 or 400 000 (without working) is sufficient for [1]. 

Drawing a new supply curve parallel and below / to the right of the original supply curve is sufficient for [1].

8 × 75 (× 1000)

Any valid working is sufficient for [1].

= $600 000

An answer of 600 000 or $600 000 (without working) is sufficient for [1].

OFR may apply.

$\frac{\left(50+75\right)}{2}\times \left(13-10\right)\times 1000$

OR
(0.5 × 75 × 9) − (0.5 × 50 × 6) = 337.5 − 150

Valid working may include:

• correct workings for initial PS (0.5 × 50 × 6)
• correct workings for final PS (0.5 × 75 × 9)
• correct workings for the trapezium $\frac{\left(50+75\right)}{2}\times \left(13-10\right)\times 1000$

Any valid working is sufficient for [1].

=$187 500

An answer of 187 500 or $187 500 (without working) is sufficient for [1].

OFR may apply.

$\frac{\left(50+75\right)}{2}\times \left(10-5\right)+1000$

OR

(0.5 × 75 × 15) − (0.5 × 50 × 10) = 562.5 − 250

Any valid working is sufficient for [1].

Valid working may be:

• correct workings for initial CS (0.5 × 50 × 10)
• correct workings for final CS (0.5 × 75 × 15)
• correct workings for the trapezium $\frac{\left(50+75\right)}{2}\times \left(10-5\right)+1000$

= $312 500

An answer of 312 500 or $312 500 (without working) is sufficient for [1].

OFR may apply.

Allocate [1] for each valid function.

Functions may include:

• promotes trade liberalization
• sets trade rules
• ensures that trade rules are adhered to
• settles trade related disputes
• trade-related technical assistance
• a forum for trade negotiations.

NB Describing trade liberalization in two ways (eg removal of barriers, lowering of tariffs) only counts as one function.

Any other valid function(s).

Award [1] for an accurate and labelled world cotton supply curve.

initial cost
= $600 000

Calculated earlier on (b)(ii), OFR applies.

new cost of subsidy
8 × 50 × 1000 = $400 000

new cost of subsidy minus initial cost
$400 000 − $600 000

Any valid working is sufficient for [1].

= $200 000 or a decrease of $200 000

An answer of −$200 000 or −200 000 is sufficient for [1].

OFR applies.

NB Responses should refer to the economy of San Marcus, not just one industry such as the consumers or producers of cotton.