There are only two countries in the world: Richland and Poorland. The labor demand curve in Richland is given by:
W = K – 4L
Where W is the wage rate, K is a variable determined by accumulated capital stock in the country, and L is the labor force in the country. K = 500 is initially supplied by the capitalists in Richland. There is no depreciation.
Next to Richland, is Poorland. Poorland is poor and has an Arthur Lewis-type Dual Economy. A large number of workers in the agricultural sector there are not productive – they are disguised unemployed with a marginal product labor equal to zero. They are looking for jobs in Richland. Wage in Poorland is institutionally fixed at W = 10.
Nationalists in Richland argue that more open immigration policy will reduce wages in Richland.
But the globalists argue that will be good for global welfare.
Due to a loophole in the immigration system, however, 10 workers were able to migrate to Richland.
As a result of this, Richland labor force increases to 110 (L = 110 now). All workers work no matter what the wage is.
Nationalists are furious: they want the 10 immigrant workers to be deported. Globalists are, of course, happy. The Chief Economist of Richland offers a compromise solution. The economist notes that the capitalists and the immigrants benefit form immigration. So, both the capitalists and the immigrants in Richland should pay a tax on the additional income that received as a result of migration. The tax revenue collected would be given away to the original Richland workers who suffered the loss of wage due to immigration.
Please show your calculations and answer the following questions. There is no need to draw any graph (you can draw the graph on your scratch paper, but do not upload.)
Due to the immigration of 10 workers from Poorland to Richland:
(a) How much does the Richland wage change?
(b) How much does the World Welfare change?
(c) How much do the capitalists’ incomes change in Richland?
(d) How much do the total wages of the immigrants’ change (compared to their wages in Poorland)?
(e) If we follow the suggestion of the Richland economist, what would be the flat marginal tax rate (tax imposed on extra income that accrue to the capitalists and the immigrants due to migration) that will exactly compensate the Richland workers for their loss of wages? Find out the percentage of tax that will do the job.