Lecture 14 Friday, October 5. Lecture. 1. HW2 due Sunday Widgets remain in usable condition if pulled out of the ocean.

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1 Lecture 14 Friday, October 5 1. HW2 due Sunday Widgets remain in usable condition if pulled out of the ocean. 2. Midterm 1, Mon. Oct. 15 Lecture 1. A comment about the growth of Wal-Mart 2. Agricultural Subsidies 3. Supply Management

2 Why talk about farming? Sector of economy with many buyers and sellers so we can apply the theory of perfect competition. Good case can be made that the sector would operate efficiently without government intervention. Yet have major government intervention. Recent Farm Bills (1) Decoupling of subsidy payments Rather than base payment on current production, base on historical production. So lump sum transfer payment Good because creates less deadweight loss Good because we don t get into trouble with our international trade agreements

3 (2) Scaling back payments so high income people don t get them. USDA bill: can t get payment if adjusted gross income above 200K (3) Expanding program for fruits (fruit farmers like it. Urban representatives like it because free fruit for city schools.) House bill: can t get payments if adjusted gross income above million. Explains the map of people in New York City collecting subsidies at USDA website. Going after fat cats

4 Supply Management Quota System: Limit Production to keep up the price. Examples Sugar Industry (called allocations) Formerly peanut and tobacco, but recently a buyout. Canada: Dairy, Eggs, Tobacco Taxicabs in New York (quota units called a medallion Government likes it because doesn t cost money. Sugar Bill: What do to do about upcoming sugar imports from Mexico from NAFTA USDA bill: cut domestic production. House bill: buy up the Mexican sugar and make ethanol out of it.

5 Quota System in Econland Piece of paper giving the right to produce one widget. Suppose allocated to S1, S3, S5. Suppose trade in quotas not permitted. What is equilibrium? Just like what would happen if S2, S4, S6 were the only suppliers. Q = 3 P =

6 PS in Free Market (P=$5) PS Quota nontrad (P=$7) S S2 3.5 S S4 1.5 S S6 S7 Total Not efficient because: Condition 3 violation (Q to small) Condition 2 violation (Don t have lowest cost producers. S5 produces and S2 does not.) Alternative: Marketable quota Solve for equilibrium with marketable quota. Key point: When quota tradeable, doesn t matter how initially allocated. Quota will end up with the lowest cost producers.

7 How Calculate Equilibrium With Quota? Step 1: Compare total quota to free market quantity. If quota is more than free market, irrelevant and price of quota = 0. If quota quantity less, then market quantity is quota. Here Quota=3 < 5 (unregulated Q) Step 3: Set quota price so marginal producer breaks even taking into account the opportunity cost of quota. Full cost = $production cost + $cost of quota Step 2: Get widget price from demand curve at quota. Here P = $7.

8 Marginal production cost at Q = 3 is $3. (see this on S curve) Full cost must equal $7 so just break even. Thus Price of quota = $7 - $3 = $4. Price net of quota = $7 - $4 = $3

9 What do S people get? Two parts Equilibrium with Quota of $3 Part 1:PS at Net Price = $3 = 4.5 Part 2: Quota profit = $4 per unit. ( 3 units)=12 Total PS = 16.5 (Compare with 3.5 when quota not tradeable)

10 Check your knowledge? Suppose D&S as below. Quota = 7? Quota = 4? Tobacco Quota In U.S., got rid of system. But bought out producers. (payments 10 billion over 10 years) quota owner $7 lb quota renter $3 lb Canada: Still have system

11 Tobacco Quota Trader Page 1 of 1 Widget Quota Trader Page 1 of 1 "Finally, Good News for the Tobacco Producer" Welcome to Bryan McBride's active website developed to serve you better. mcbride@tobaccoquotatrader.com Bulletin Board - Newsletter - FAQ's - Contact Us Widget Quota Trader Finally: Good News for the Widget Producer! Welcome visitors and users. In order to understand TQT and how it operates please click on FAQ's first to read rules and regulations. Link to Remax Click here to Buy, Sell, Rent Tobacco Quota & Check Quota Prices. Click here to Buy, Sell, Kilns and Equipment. Click here to Buy, Sell, Farms and other Properties. Visit Farms Children's Miracle Network Note: Please look around our Pages, you only need to Register & Log On if you wish to Bid On - Sell - or Rent Quota. Last updated :36:29.0 Bryan McBride Tobacco Quota Trader (TQT) is a secure, private interactive website where you can view farms and equipment for sale, or check out the current price of tobacco quota and even sell or buy quota, 24 hrs a day, right from your home. Subject to terms & conditions, rules & regulations of the Ontario Flu- Cured Tobacco Growers' Marketing Board. Current Market Price = $4 per unit Click here to buy 10/5/2007 file://c:\a_teach\1101_f07\web\widget Quota Trader.htm 10/5/2007