Transcript No Slide Title

Price policy interventions in a large open
economy
Lecture 23
Economics of Food Markets
Alan Matthews
Objectives
• To show how countries which attempt to raise their
domestic farm prices lower world market prices for
everyone else
• To be able to incorporate terms of trade effects into the
welfare analysis of farm policy interventions in the case of
large countries
• To show how countries which attempt to stabilise their
domestic farm prices destabilise world market prices for
everyone else
Reading
• McCalla and Josling article
Determination of excess supply and demand curves
Pd
Pw
S
ES
P1
P2
P3
IM
D
Q3
Q1
Q2
Q4
Domestic market
Qd
X1
X2
World market
Qw
The impact of introducing an export subsidy on the excess
supply curve
Pd
Pw
S
ES
P1
t
ES*
P2
t
D
Q1
Q2
Domestic market
Qd
X
World market
Qw
Determination of world market equilibrium
D
D
ES
S
Exporter A
S
ID
World market
Importer B
The impact of a tariff on world market equilibrium
D
D
t
ES
Pw
P’w
t
S
S
ID
ID*
Exporter A
World market
Importer B
Impact of an export subsidy in a large exporting country
P
S
Change in CS =
-a-b
Change in PS =
a+b+c
Change in taxpayer cost
=
-(b+c+d+e+f+g+gh+i)
Overall welfare cost =
-(b+d+ terms of trade
loss)
Peu
a
Pw
b
e f
c
g
h
d
i
P’w
D
Q
Impact of trade liberalisation on world markets –
three country model
Pus
Pw
Peu
ESus
ESt
ESeu
P’w
Pw
IMrow
Impact on world market price instability
World price
ES'EU
ESEU
Pw3
Pw2
Pw1
Pw4
Pw5
ID1
ID
ID2
Quantity exported/imported
Policies which
stabilise
domestic
prices
destabilise
world market
prices
Examples: EU
variable levy
system
Specific vs ad
valorem
tariffs
Summary
• protection in (large) countries raises their domestic
prices but lowers world prices
• stabilising domestic prices destabilises world
prices
• net exporting countries lose because of protection
in third countries because of the terms of trade
effect
• net importing countries gain because of protection
in third countries because of the terms of trade
effect