Price policy analysis in a closed economy setting Economics of Food Markets Lecture 13 Alan Matthews

Policy instruments Consumer subsidy Producer direct payment Input subsidy (e.g. fertiliser subsidy) Production quota (supply control) Purpose is to be able to the price and quantity (allocation) effects as well as the benefits and costs (welfare effects) of each instrument

Policy interventions In the standard supply and demand market diagram, policy interventions are often represented by shifts in demand or supply curves which change the equilibrium price and quantity traded Interventions can take the form of a fixed or proportional tax or subsidy –Consumer subsidy of 50c per kg of flour, a fixed or specific subsidy, causes a parallel shift in the demand curve –Consumer subsidy of 50% of the price of flour, a proportional or ad valorem subsidy, causes a rotation of the demand curve The resulting welfare changes are measured as the changes in producer surplus, consumer surplus, and taxpayer revenues.

Example: Specific consumer subsidy on flour a b c d e D0D0 D1D1 P Q P0P0 PpPp PcPc Value of specific subsidy S Q0Q0 Q1Q1

Example: Ad valorem consumer subsidy on flour a b c d e D0D0 D1D1 P Q P0P0 PpPp PcPc Value of specific subsidy S Q0Q0 Q1Q1

Example: Fixed direct payment per tonne to producers a b cf e D P Q P0P0 PpPp PcPc Value of fixed payment S0S0 Q0Q0 Q1Q1 d S1S1

Example: Unit fertiliser subsidy a bc f e D P Q P0P0 PmPm S0S0 Q0Q0 Q1Q1 d S1S1 g

Example: Production quota with efficient allocation of quota reductions

Example: Production quota with proportional allocation of quota reductions