Price policy interventions in a large open economy

1
Price policy interventions in a large open economy

• Lecture 23
• Economics of Food Markets
• Alan Matthews

2
Objectives

• To show how countries which attempt to raise
  their domestic farm prices lower world market
  prices for everyone else
• To be able to incorporate terms of trade effects
  into the welfare analysis of farm policy
  interventions in the case of large countries
• To show how countries which attempt to stabilise
  their domestic farm prices destabilise world
  market prices for everyone else

3
Reading

• McCalla and Josling article

4
Determination of excess supply and demand curves
Pd
Pw
S
ES
P1
P2
P3
IM
D
Qw
Q1
Q2
X1
X2
Q3
Q4
Qd
World market
Domestic market
5
The impact of introducing an export subsidy on
the excess supply curve
Pd
Pw
S
ES
P1
t
ES
P2
t
D
Qw
X
Q1
Q2
Qd
World market
Domestic market
6
Determination of world market equilibrium
D
D
ES
S
S
ID
Importer B
World market
Exporter A
7
The impact of a tariff on world market equilibrium
D
D
ES
t
Pw
t
Pw
S
S
ID
ID
Importer B
World market
Exporter A
8
Impact of an export subsidy in a large exporting
country

• Change in CS
• -a-b
• Change in PS
• abc
• Change in taxpayer cost
• -(bcdefgghi)
• Overall welfare cost
• -(bd terms of trade loss)

P
S
Peu
a
b
c
d
e
g
i
Pw
f
h
Pw
D
Q
9
Impact of trade liberalisation on world markets
three country model
Pus
Pw
Peu
ESt
ESus
ESeu
Pw
Pw
IMrow
10
Impact on world market price instability

• Policies which stabilise domestic prices
  destabilise world market prices
• Examples EU variable levy system
• Specific vs ad valorem tariffs

11
Summary

• protection in (large) countries raises their
  domestic prices but lowers world prices
• stabilising domestic prices destabilises world
  prices
• net exporting countries lose because of
  protection in third countries because of the
  terms of trade effect
• net importing countries gain because of
  protection in third countries because of the
  terms of trade effect