Transcript Baldwin & Wyplosz The Economics of Euroepan Integration

Essential Micro Tools
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Preliminaries I
• Demand curve shows
how much consumers
would buy of a particular
good at any particular
price.
• It is based on
optimisation exercise:
– Would one more be worth
price?
price
mu’
p*
Marginal
utility curve is
the demand
curve for one
consumer
mu”
• Market demand is
aggregated over all
consumers’ demand
curves.
– Horizontal sum.
c’ c* c”
quantity
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Preliminaries I
• Supply curve shows how
much firms would offer to
the market at a given price.
• Based on optimisation:
– Would selling one more unit
at price increase profit?
• Market supply is
aggregated over all firms.
price
Marginal
cost
mc”
A firm’s supply
curve is its
marginal cost
curve.
p*
mc’
– Horizontal sum.
q’ q* q”
quantity
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Welfare analysis: consumer surplus
• Since demand curve
based on marginal
utility, it can be used to
show how consumers’
well-being (welfare) is
affected by changes in
the price.
• Gap between marginal
utility of a unit and
price paid shows
‘surplus’ from being
able to buy c* at p*.
price
Triangle is sum of
all gaps between
marginal utility
and price paid
(summed over
total consumption)
p*
= MU
Demand
curve
c*
quantity
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Welfare analysis: consumer surplus
• If the price falls:
– Consumers obviously better off.
– Consumer surplus change quantifies
this intuition.
price
• Consumer surplus rise, 2 parts:
– Pay less for units consumed at old
price; measure of this = area A.
p*
p’
A
B
• A = Price drop times old consumption.
– Gain surplus on the new units
consumed (those from c* to c’);
measure of this = area B.
• B = sum of all new gaps between
marginal utility and price
Demand
curve
c* c’
quantity
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Welfare analysis: producer surplus
• Since supply curve
based on marginal cost,
it can be used to show
how producers’ wellbeing (welfare) is
affected by changes in
the price.
• Gap between marginal
cost of a unit and price
received shows
‘surplus’ from being
able to sell q* at p*.
price
Triangle is sum of
all gaps between
price received and
marginal cost
(summed over
total production)
S=MC
p*
q*
quantity
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Welfare analysis: producer surplus
• If the price rises:
– producers obviously better off.
– Producer surplus change
quantifies this intuition.
• producer surplus rise, 2 parts:
– Get more for units sold at old
price; measure of this = area A.
price
Supply
curve
p’
A
B
p*
• A = Price rise times old
production.
– Gain surplus on the new units
sold (those from q* to q’).
– measure of this = area B.
• B= sum of all new gaps between
marginal cost and price.
q*
q’
quantity
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Preliminaries II
• Introduction to Open Economy Supply & Demand
Analysis.
• Start with Import Demand Curve.
– This tells us how much a nation would import for any
given domestic price.
– Presumes imports and domestic production are perfect
substitutes.
– Imports equal gap between domestic consumption and
domestic production.
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Import demand curve (MD)
Home
Supply
price
price
1
P*
2
P”
P”
3
P’
Home
import
demand
curve,
MDH
Home
Demand
Z’ Z”
C”
C’
quantity
P’
M”
M’
imports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Import supply curve (MS)
price
price
Foreign
Supply
P”
P’
2
P*
1
Foreign
3
export
Supply
curve,
XSF, or
MSH.
Foreign
Demand
C” C’
Z’ Z”
quantity
X’
X”
exports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Welfare & Import demand curve
Home
Supply
price
ToT effect
price
NB: E=B+D
1
P*
2
P”
P”
P’
A
B
C
D
C
3
E
Home
import
demand
curve,
MDH
Home
Demand
Z’ Z”
C”
C’
quantity
P’
M”
M’
imports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Welfare & Import supply curve
price
price
Trade price effect, i.e.ToT effect
Foreign
Supply
F=C+E
P”
P’
A
C
B
D
E
D
F
2
P*
Foreign
3
export
Supply
curve,
XSF, or
MSH.
1
Foreign
Demand
C” C’
Z’ Z”
quantity
X’
X”
exports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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The Workhorse: MD-MS Diagram
• Diagram very useful.
– easy identification of price
and volume effects of a trade
policy change.
euros
Import
Import
demand curve supply curve
• Welfare change likewise
easy.
MS
PFT
MD
imports
Imports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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MD-MS + open econ. supply & demand
• MD-MS diagram can be usefully teamed with open
economy supply and demand diagram.
• Permits tracking domestic & international consequences of
a trade policy change.
Domestic demand curve
Domestic
price, euros
euros
Domestic
supply curve
Sdom
Import
supply curve
MS
PFT
Import
demand curve
Imports
MD
Ddom
Imports
imports
Z
C
quantity
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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MFN Tariff Analysis
• 1st step: determine how tariff changes prices and
quantities.
– suppose tariff imposed equals T euros per unit.
– Small country ‘fiction’.
• Tariff shifts MS curve up by T.
– Exporters would need a domestic price that is T higher to
offer the same exports.
• Because they earn the domestic price minus T.
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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MFN Tariff Analysis
• For example,
how high would
domestic price
have to be in
Home for
Foreigners to
offer to export
Ma to Home?
– Answer is Pa+T,
so Foreigners
would see a price
of Pa.
Domestic price
Border price
MS with T
MS w/FT
XS=MS
Pa+T
2
T
Pa
MD
1
Xa=Ma
Foreign
exports
Ma
Home
imports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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MFN Tariff Analysis
• New
equilibrium
in Home
(MD=MS
with T) is
with P’ and
M’.
• Domestic
price now
differs from
border price
(price
exporters
receive).
• P’ vs P’-T.
Border price
Domestic price
XS=MS
PFT
P’-T
MS with T
MS
P’
PFT
T
MD
Foreign
exports
X’=M’
XFT=
MFT
M’
MFT
Home
imports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Positive effects
•
•
•
•
Domestic price rises.
Border price falls.
Imports fall.
Can’t see in diagram:
–
–
–
–
Domestic consumption falls.
domestic production rises.
Foreign consumption rises.
Foreign production falls.
Border price
Domestic price
MS with T
MS
XS=MS
P’
PFT
PFT
T
P’-T
MD
• Could get this in diagram
by adding open economy S
& D diagram to right.
X’=M’
XFT= MFT
Foreign
exports
M’
MFT
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
Home
imports
18
Welfare effects: Home
• Drop in imports creates loss equal area
C. (Trade volume effect).
• Drop in border price creates gain equal
to area B. (Border price effect, i.e. ToT
effect).
• Net effect on Home = -C+B.
• ALTERNATIVELY:
– Private surplus change (sum of change in
producer and consumer surplus) equal to
minus A+C.
– Increase in tariff revenue equal to +A+B.
• Same net effect, B-C (but less intuition).
Domestic
price
Home
C
P’
PFT
A
B
P’-T
MD
Home
imports
M’=X’
MFT=XFT
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Welfare effects: Foreign
• Drop in exports creates loss equal area D
– (Trade volume effect).
Border
price
Foreign
• Drop in border price creates loss equal to
area B.
– (Border price effect, a.k.a., ToT effect).
• Net effect on Foreign = -D-B.
• ALTERNATIVELY:
– Private surplus change (sum of change in
producer and consumer surplus) equal to
minus -D-B.
– Same net effect, B-C (but less intuition).
XS=MS
PFT
D
B
P’-T
X’ XFT
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
Foreign
exports
20
Welfare effects: useful compression
• In cases of more complex policy changes
useful to do Home and Foreign welfare
changes in one diagram.
• MS-MD diagram allows this:
– Home net welfare change is –C+B.
– Foreign net welfare change is –D-B.
– World welfare change is –D-C.
• NB: if Home gains (-C+B>0) it is
because it exploits foreigners by
‘making’ them to pay part of the tariff
(i.e. area B).
• Notice similarity with standard tax
analysis.
Home and
Foreign in one
diagram
Domestic
price
MS
C
P’
PFT
A
D
B
P’-T
MD
Home
imports
M’=X’ MFT=XFT
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Distributional consequences: Home
• Trade protection imposed mainly due to politically
considerations raised by distributional consequences.
• Thus important for some purposes to see domestic
consequences of trade policy change.
• For this, add the open economy supply & demand diagram
to the right of the MD-MS diagram.
– MD-MS diagram tells us the price and quantity effects of trade
policy change.
– Open-economy S&D tells us the domestic distributional
consequences.
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Distributional consequences: Home
• Home consumers lose, area E+C2+A+C1; Home producers
gain E, Home tariff revenue rises by A+B.
– net change = B-C2+-C1 (this equals B-C in left panel).
Domestic
price, euros
euros
Sdom
P’
P’
A
PFT
P’-T
B
C
MS
E
C2
D
A
C1
PFT
P’-T
B
MD
imports
Ddom
Z Z’
C’
C
quantity
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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A typology for trade barriers
• Many ways to categorise trade barriers.
• A useful 3-way categorisation.
• Focuses on ‘rents’ i.e. who earns the gap between
domestic and border price?
– DCR (domestically captured rents) e.g. tariff, import licence.
– FCR (foreign captured rents), price undertakings, export taxes.
– Frictional (no rents since barriers involve real costs of
importing/exporting), e.g.. Swedish wipers on headlights, paper
recycling for carton boxes.
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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A typology for trade barriers
• Net Home welfare
changes for:
– DCR = B-C
– FCR = -A-C
– Frictional = -A-C
• Net Foreign welfare
changes for:
euros
P’
PFT
MS
A
C
B
D
P’-T
MD
– DCR = -B-D
– FCR = +A-D
– Frictional = -B-D
• Note: foreign may
gain from FCR.
M’ MFT
Home
imports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Common Agricultural Policy
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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CAP
• Massively complex, massively expensive
policy.
• Hard to understand without seeing how it
developed.
• CAP started as simple price support policy in
1962.
• EU was net importer of most food, so could
support price via tariff.
– Technically known as a ‘variable levy.’
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Simple price support with tariff
price
Home
Demand
Home
Supply
Home
Demand
price
Home
Supply
pss
T’
Price floor
(Pw+T, or
Pw’+T’)
T
Pw’
Pw
Price floor
A
B
C1
Pw
C2
Imports
(with
floor)
Z
Zf
Cf C
Q
Z
Zf
Cf C
Q
Imports (without price floor)
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Food tax interpretation
• Price floor supported by tariff is like
all-in-one package made up of
simpler policy measures.
Home
Demand
price
Home
Supply
– (i) free trade in the presence of
– (ii) a consumption tax equal to T and
– (iii) a production subsidy equal to T.
• Price, quantity, revenue and welfare
effects are identical.
• This is insightful:
– makes plain that consumers are the ones
who pay for a price floor enforced with a
variable levy.
– Part of what they pay goes to domestic
farmers (area A),
– part of it goes to the EU budget (area B),
– part of it wasted (areas C1 and C2).
Price floor
A
B
C1
Pw
Z
Zf
C2
Cf C
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Farm size distribution in 1987
• Very skewed ownership:
– Biggest 7% of farmers owned ½ of the land.
– Smallest 50% of farmers owned only 7% of the land.
Farm size class
(hectares)
Number of farms Number of farms Share of EU12
(millions)
as share of total farm land in size
class
Average farm
size (hectares)
1 to 5
3.411
49.2%
7.1%
2.4
5 to 10
1.163
16.8%
7.1%
7.0
10 to 20
0.936
13.5%
11.5%
14.1
20 to 50
0.946
13.7%
25.7%
31.2
over 50
0.473
6.8%
48.6%
117.6
total
6.929
100%
115 (mill.ha)
16.5
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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price
Family farm
supply curve
price
price
Commercial farm
supply curve
Total supply curve
Pw+T
Asmall
Atotal
Abig
Pw
B
Zsmall
Q
Zbig
Q
Ztotal
Q
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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CAP problems
• #1 Problem: The supply problem.
• ‘Green’ revolution technology boom, supply ↑
– High guaranteed prices encourage investment &
adoption.
– Output rises much faster than consumption.
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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price
price
S1 S2 S3
Home
Demand
S4
Home
Supply
p1ss
p2ss
Price floor
p3ss
a
p4ss
b
c d
e
Price floor
S’
B
A
C1
C2
Pw
EU
purchase
Home
Demand
Q
Cf
Zf
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
Q
33
Follow-on problems of oversupply
• EU switches from net food import to exporter in most
products.
Production (1,000 tons)
Export-Imports (1,000 tons)
Area Harvested (1,000 ha.)
Yield (tons/ha.), right scale
Cheese
120000
7
100000
6
5
Poultry
80000
4
Pork
60000
Butter
1967-70
1996-99
3
40000
2
20000
1
0
0
-20000
-1
Beef
Sugar
Wheat
2001
1996
1991
1986
1981
1976
1971
1966
1961
-40
-20
0
20
40
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Follow-on problems: World market impact
• Import protection
insufficient for price
support.
• CAP becomes major food
buyer.
price
MD (CAP)
MS (no
dumping)
pwo
MS (with
dumping)
– Some of this is dumped on
world market.
pw’
• CAP protection and
dumping depresses prices
on world markets.
pw”
– Harms non-EU food
exporters.
MD (no CAP)
X” X’
Xo
World
imports
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Follow-on problems: Budget
Total CAP cost (mill.euros)
Total CAP cost (mill.euros)
CAP's budget share (right scale)
CAP's budget share (right scale)
€10.0
€9.0
€8.0
€7.0
€6.0
€5.0
€4.0
€3.0
€2.0
€1.0
€0.0
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
€45
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
€40
Million euros
Million euros
• Buy and storing or dumping food becomes
increasingly expensive.
€35
€30
€25
€20
€15
€10
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Other CAP problems
• #2 Problem: The farm income problem.
– General problem, inelastic demand means farm sector’s total income falls with prices, so
either average farmer income must fall, or then number of farmers must fall.
• In EU: Average farm incomes fail to keep up despite huge protection and budget
costs.
– Most of money goes to big farms that don’t need it:
• CAP makes some farmers/landowners rich.
• Keeps average (i.e. small) farmer on edge of bankruptcy.
– Farmers continue to exit farming (about 2% per year for last 4 decades).
100%
80%
60%
Change in number of EU10
farms, 1970-1987
40%
20%
0%
-20%
-40%
-60%
1 to 5
5 to 10
10 to 20
20 to 50
over 50
All farms
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Other CAP problems
• Factory Farming:
– Pollution,
– Animal welfare,
– Nostalgia.
• Bad for ‘image’ and thus public support for CAP.
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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CAP Reforms
• Supply control attempts:
– 1980s, experimentation with ad hoc & complex set supply
‘controls’ to discourage production.
– Generally failed; technological progress & high guaranteed prices
overwhelmed supply controls.
• 1992: MacSharry Reforms:
– Basic idea: CUT PRICES supports to near world-price level &
COMPENSATE farmers with direct payments.
– Was essential to complete the Uruguay Round.
– Worked well.
• June 2003 Reforms; essential to Doha Round.
– Implementation 2004-2007.
– Similar to MacSharry reforms in spirit.
– Still might not be enough to allow Doha Round to finish.
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Evaluation of the today’s CAP
• Supply problems & food “mountains.”
– Left figure: massive shift to direct payments.
– Price cut reduced EU buying of food: right figure shows important
drop in EU storage of food.
– EU dumping of food on world market also dropped.
€45
€40
Wheat
Beef (right scale)
Market supports
Direct payments
€35
20,000
1,000
€30
€20
€15
€10
12,000
500
8,000
€5
4,000
€0
0
2002
2000
1998
1996
1994
1992
2001
0
1990
1991
1,000 tonnes
16,000
€25
1,000 tonnes
Billion euros
Coarse grains
Dairy (right scale)
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Farm incomes & CAP support inequity
• Reformed CAP (post MacSharry) support still goes
mostly to big, rich farmers.
– payments intended to compensate, so inequity continued.
• Half the payments to 5% of farms (the largest).
• Half the farms (smallest) get only 4% of payments.
• Recent studies show that only about half of these
payments go to farmers.
– Rest to non-farming landowners and suppliers of
agricultural inputs (seed, fertilisers, agri-chemicals, etc.)
– See: “Who Finances the Queen’s CAP payments?”
http://shop.ceps.be/BookDetail.php?item_id=1285
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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CAP support inequity
Size Class
Payment per
farm
% of EU15
farms
in size
class
Number of
farms
in size
class
% of EU15
payme
nts to
size
class
Cumulative %
of budget
(from
largest to
smallest)
Cumulative %
of farms
(from
largest to
smallest)
0 to 1.25
€405
53.76%
2,397,630
4.3%
100.0%
99.97%
1.25 to 2
€1,593
8.54%
380,800
2.7%
95.7%
46.21%
2 to 5
€3,296
16.30%
726,730
10.7%
93.0%
37.67%
5 to 10
€7,128
9.17%
409,080
13.0%
82.2%
21.37%
10 to 20
€13,989
6.81%
303,500
19.0%
69.2%
12.20%
20 to 50
€30,098
4.13%
184,100
24.8%
50.2%
5.39%
50 to 100
€67,095
0.94%
41,700
12.5%
25.4%
1.27%
100 to 200
€133,689
0.24%
10,720
6.4%
12.9%
0.33%
200 to 300
€241,157
0.05%
2,130
2.3%
6.5%
0.09%
300 to 500
€376,534
0.03%
1,270
2.1%
4.2%
0.04%
over 500
€768,333
0.01%
610
2.1%
2.1%
0.01%
Average, All farms
€5,015
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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Future challenges
• Doha Round:
– Completing these WTO talks may require deeper reform
of CAP.
• Eastern Enlargement:
– Number of farms will rise.
– Farmland rise from 130 million hectares to 170 million.
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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EU newcomers: Farm facts
© Baldwin & Wyplosz 2006. The Economics of European Integration, 2 nd Edition
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