AGEC 429: AGRICULTURAL POLICY LECTURE 23: AGRICULTURAL TRADE POLICY ANALYSIS II

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1 AGEC 429: AGRICULTURAL POLICY LECTURE 23: AGRICULTURAL TRADE POLICY ANALYSIS II

2 AGEC 429 Lecture #23 AGRICULTURAL TRADE POLICY ANALYSIS II Problem Set #4 Review 1. Previous Farm Bills allowed for an export subsidy for cotton. In the graph below, illustrate the effects of a U.S. cotton export subsidy on U.S. cotton supply, demand, exports, and price. Assume that the export subsidy is set such that the U.S. price is supported at a price (P S ) which is above the market equilibrium (see the graph below). A. Illustrate the market and cost effects of the U.S. cotton export subsidy on the graph below. Shade in the area on the graph representing the cost of the export subsidy. Put letters on your graph to show the initial (equilibrium) levels of prices and quantities and the new levels of prices and quantities with an export subsidy. Use arrows to show direction of change in quantities and prices as a result of the export subsidy. P S 0 0

3 B. Now, summarize the market and cost effects of the export subsidy by filling in the boxes in the table below with ARROWS to indicate how the various variables change as a result of the export subsidy. NOTE: use to indicate increase, for decrease, 0 for no change, and for not clear. Variable Change in Level of Variable U.S. Supply (Q SUS ) U.S. Demand (Q DUS ) U.S. Price (P US ) U.S. Exports (Q XUS ) World Price (P W ) U.S. Gov t Cost

4 C. Policy Analysis (1) Suppose you are an adviser to a U.S. policymaker who wants to know whether supporting the price of cotton at the support level (P S ) using an export subsidy imposes a big cost on taxpayers or not. What would you tell him/her? Extra Credit (1 point): Under what conditions is an export subsidy likely to be quite costly and under what conditions is it likely to be not so costly? (2) The policymaker also wants to know the consequences of an export subsidy for producers, consumers, and taxpayers. What would you tell this policy maker? Extra Credit (1 point): The policy maker also wants to know whether an export subsidy is a cost-effective way to support farm price. What would be your response?

5 2. The U.S. places a tariff on imports of vegetables because imports compete with the production by U.S. vegetable producers. The U.S. has been under great international pressure to remove the tariff on U.S. vegetable imports. A. On the diagram below, illustrate the vegetable market effects of the U.S. tariff on vegetable imports and then show what would happen if the tariff was REMOVED. First, you will have to show the tariff and its market effects on the graph below. Shade in the area on the graph representing the revenue from the vegetable import tariff. Then, you can show how quantities and prices change when the tariff is removed using arrows to show the directions of change. Be sure to use arrows that show the effects of removing the tariff on the quantities of U.S. vegetables supplied, demanded, and imported and on the U.S. and world vegetable prices and trade. Put letters on your graph to show the levels of prices and quantities with and without a vegetable import tariff. Use arrows to show the direction of change in quantities and prices as a result of removing the vegetable import tariff. P S 0 0

6 B. Now, summarize the market and cost effects of REMOVING the vegetable import tariff by filling in the boxes in the table below with ARROWS to indicate the change in the various variables as a result of removing the tariff. Variable Change in Level of Variable U.S. Supply (Q SUS ) U.S. Demand (Q DUS ) U.S. Price (P US ) U.S. Imports (Q MUS ) World Price (P W ) U.S. Gov t Revenue

7 C. Policy Analysis Again, assume you are an advisor to an agricultural policymaker who, this time, asks you to analyze what would happen if, after removing the vegetable import tariff, we imposed an equivalent quota on vegetable imports instead. Provide an analysis for the policymaker of how an equivalent import quota differs from an import tariff in its effects on the U.S. vegetable market (quantities supplied, demanded, and imported and price), world price, and government revenues. (HINT: If you read the question carefully and you took good notes in class, you ll see that this question can be answered quickly and in few words).