Agriculture and Environment
03.376 ERE3
Handout 2
Graphical policy analysis
Price Support System
p
S
D
q
Market Equilibrium with International Trade
p
p
S
SROW
ES
ED
D
DROW
q
Importer
p
q
q
Exporter
Effect of Demand Elasticities of Importer
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p
p
S
ES
D
DROW
ED
q
Importer
SROW
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q
Exporter
Consumer Welfare Changes (Losses
p
p
S
)
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SROW
ES
ED
D
DROW
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Importer
, Gains
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q
Exporter
Producer Welfare Changes (Losses
p
p
S
)
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SROW
ES
ED
D
DROW
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Importer
, Gains
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q
Exporter
Net Welfare Gains
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p
S
SROW
ES
ED
D
DROW
q
Importer
p
q
q
Exporter
Import Quota
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p
p
S
ES
D
DROW
ED
q
Importer
SROW
q
q
Exporter
Export Quota
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p
ES
S
SROW
ED
D
DROW
q
Importer
p
q
q
Exporter
Negative Supply Shift in Exporting Country
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p
S
SROW
ES
ED
D
DROW
q
Importer
p
q
q
Exporter
Import Tariff in Importing Country
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p
S
D
ES
SROW
DROW
ED
q
Importer
Tariff
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q
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Exporter
Welfare Effects from Import Tariff
Dead Weight Losses
Government Revenue
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p
S
D
ES
SROW
DROW
ED
q
Importer
Tariff
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q
q
Exporter
Export Subsidy in Exporting Country
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p
p
Subsidy
S
SROW
ES
ED
D
DROW
q
Importer
q
q
Exporter
General Comments
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Free trade leads to one price in all involved markets (ignoring transportation costs) and to
the highest total welfare. All trade restrictions including no trade (autarky) have dead
weight losses.
Trade beneficiaries are consumers in importing countries and producers in exporting
countries. Trade losers are producers in importing countries and consumers in exporting
countries. (All other things being equal)
Import tariffs imposed by an importer change the perceived (perceived by the importing
country) excess supply curve of the exporting country
Export subsidies change the perceived (perceived by the exporting country) excess
demand curve of the importing country.
Effective quotas or import tariffs drive prices apart (lower price in exporting country and
higher price in importing country relative to free trade situation) and decrease the trade
volume.
Export subsidies drive prices apart (relative to free trade prices increase in exporting
country and decrease in importing country) and increase trade.
Negative supply shifts or positive demand shifts in importing countries increase trade and
vice versa.
Positive supply or negative demand shifts anywhere decrease prices and vice versa.
Magnitudes of changes in welfare, price, trade, supply, and demand depend on the
elasticities of demand and supply in both the exporting and importing regions.
Exercises:
1)
2)
3)
4)
5)
Graphically illustrate the effects of population growth in food importing country
(higher population leads to increased food demand in importing country).
Graphically illustrate the effects of a domestic environmental policy in food
exporting country (environmental policy increase cost of food production in
exporting country).
Graphically illustrate who benefits and who loses from trade quotas.
What are the effects of a price support system for producers in an importing
country.
If two alternative trade policies (quota and tariff) lead to the same trade
equilibrium, are the welfare effects identical?