Transcript Price policy analysis in a closed economy setting

Price policy analysis in a
closed economy setting
Economics of Food Markets
Lecture 13
Alan Matthews
Policy instruments
•
•
•
•
Consumer subsidy
Producer direct payment
Input subsidy (e.g. fertiliser subsidy)
Production quota (supply control)
• Purpose is to be able to the price and
quantity (allocation) effects as well as the
benefits and costs (welfare effects) of
each instrument
Policy interventions
• In the standard supply and demand market diagram,
policy interventions are often represented by shifts in
demand or supply curves which change the equilibrium
price and quantity traded
• Interventions can take the form of a fixed or proportional
tax or subsidy
– Consumer subsidy of 50c per kg of flour, a fixed or specific
subsidy, causes a parallel shift in the demand curve
– Consumer subsidy of 50% of the price of flour, a proportional or
ad valorem subsidy, causes a rotation of the demand curve
• The resulting welfare changes are measured as the
changes in producer surplus, consumer surplus, and
taxpayer revenues.
Example: Specific consumer
subsidy on flour
P
S
Pp
a
b
P0
e
c
Pc
Value of specific subsidy
f d
D1
g
D0
Q0
Q1
Q
Example: Ad valorem consumer
subsidy on flour
P
D1
S
D0
Pp
a
P0
Pc
c
b
e
Value of ad valorem subsidy
f d
g
Q0
Q1
Q
Example: Fixed direct payment per
tonne to producers
P
S0
S1
Pp
a
P0
b
e
c
d
Value of fixed payment
f
Pc
D
Q0
Q1
Q
Example: Unit fertiliser subsidy
S0
P
S1
P0
f
a
Pm
d
bc
g
e
D
Q0
Q1
Q
Example: Production quota with
efficient allocation of quota reductions
Example: Production quota with proportional
allocation of quota reductions