Transcript The Economics of Food Markets

The Economics of Food
Markets
Price/Quantity Allocation and Welfare
Effects of Export Tax. Eg. Thailand’s
Rice Market
Tutorial: 27th November 2007
Export Taxes and Thailand
• Large producer with surpluses of rice
• Unlike many countries who must import a lot of
their consumption needs, Thailand generates
foreign exchange by exporting rice.
• But dependence on rice has posed problems
due to unstable world prices:
– Rice represents large portion of national income
– It’s the staple food for consumption
• Government has tried to protect economy from
price fluctuations by imposing tax on exports.
(i) Effects of Export Tax on Thai Rice: Elastic Supply
Price
Price
Ptw
Export
Supply
D
Qd
Pw
Ptd
A
C
E
F
B
International
Demand
Dd
Qd
Qt d
Qt s
Qs
Quantity
e’
e
Exports
Elastic Supply of Thai Rice
• Before export tax: world price = domestic price =
Pw
• Producers supply Qs & Consumers demand Qd
• After export tax: Domestic supply falls (Qs to Qts)
because producers bear part of tax, receiving a
lower price, Ptd.
• Producer surplus falls by A+B+C
• Consumers benefit from increased consumption
(Qd to Qtd) and increased consumer surplus of
A+B
• Conclusion: Domestic producers lose and
domestic consumers gain.
Elastic Supply of Thai Rice
• A large part of the cost of the tax is borne
by foreign customers who pay higher price
• Producers effectively pay part of tax also
by receiving lower domestic price, Ptd.
• Total government revenue = E + F
• Decline in economic efficiency
represented by deadweight loss triangles
B+D.
(ii) Effects of Export Tax on Thai Rice: Inelastic Supply
Price
Price
Sd
Ptw
Export
Supply
D
Pw
A
E
C
F
Ptd
B
International
Demand
Dd
Qd
Qt d
Qs
Qt s
Quantity
e’
e
Exports
Elastic Supply vs Inelastic Supply
• Thailand is a large global producer of rice
－＞ domestic supply affects export supply
• When supply is more inelastic, the size of
deadweight loss D, is less.
• Why?
• Because domestic producers are less
inclined to reduce supply.
• Conclusion?