CHAPTER 9 OUTLINE.ppt

PRICE SUPPORTS AND PRODUCTION QUOTAS 9.4 1985 Supply: QS = 1800 + 240P 1985 Demand: QD = 2580 ? 194P In 1985, the demand for wheat was much lower than in 1981, because the market-clearing price was only $1.80. To increase the price to $3.20, the government bought 466 million bushels and also imposed a production quota of 2425 million bushels. The Wheat Market in 1985 Figure 9.13 2425 = 2580 ? 194P + Qg Qg= ?155 + 194P Qg= ?155 + 194($3.20) = 466 million bushels Cost to the government = $3.20 x 466 million = $1491 million IMPORT QUOTAS AND TARIFFS 9.5 In a free market, the domestic price equals the world price Pw. A total Qd is consumed, of which Qs is supplied domestically and the rest imported. When imports are eliminated, the price is increased to P0. The gain to producers is trapezoid A. The loss to consumers is A + B + C, so the deadweight loss is B + C. Import Tariff or Quota That Eliminates Imports Figure 9.14 ● import quota Limit on the quantity of a good that can be imported. ● tariff Tax on an imported good. IMPORT QUOTAS AND TARIFFS 9.5 When imports are reduced, the domestic price is increased from Pw to P*. This can be achieved by a quota, or by a tariff T = P* ? Pw. Trapezoid A is again the gain to domestic producers. The loss to consumers is A + B + C + D. If a tariff is used, the government gains D, the revenue from the tariff. The net domestic loss is B + C. If a quota is used instead, rectangle D becomes part of the profits of foreign producers, and the net domestic loss is B + C + D. Import Tariff or Quota (General Case) Figure 9.15 IMPORT QUOTAS AND TARIFFS 9.5 U.S. supply: QS = ? 7.48 + 0.84P U.S. demand: QD = 26.7 ? 0.23P At the world price of 12 cents per pound, about 23.9 billion pounds of sugar would have been consumed in the United States in 2005, of which all but 2.6 billion pounds would have been imported. Restricting imports to 5.3 billion pounds caused the U.S. price to go up by 15 cents. Sugar Quota in 2005 Figure 9.16 IMPOR