Transcript The government of an importing country wants to introduce a policy

The government of an importing country wants to introduce a policy
to support the incomes of its farmers. It is considering making
the choice between three policies.
A) Import Tariff
B) Import Quota
C) Deficiency Payment
Any policy has 3 elements
1) Objectives
2) Instruments
3) Rules for Operating
Import Tariff
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Taxes on Imports
Frontier Level Instrument
Increase in price effects both supply & demand
Imports Reduced – excess demand curve shifts
In contrast – no subsidy involved, generates
government revenue
• Negative result for consumers – carry main burden
Import Quota
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Limits placed on quantity of imports
In contrast to tariff – effect is on quantity
Frontier level instrument
Negative result for consumers
Imports are reduced
Deficiency Payment
• Subsidy paid to farmers to eradicate the effects of a
fluctuating lower market price
• Farm level instrument
• Domestic supply is only effected - increased by the same
amount imports are reduced - similar effects to input
subsidy
• Domestic supply becomes entirely unresponsive to
changes below guaranteed price
• Excess demand curve shifts
• Demand for imports inelastic below guaranteed price
• Contrast – costs government money
Which is better for FARMERS??
• Deficiency Payments
• Guaranteed minimum price
• Most efficient transfer – 25% cost in
farmers hands
• Consumers not affected – only supply side
• But costs government money