1. Price policy analysis in an open economy setting
Economics of Food Markets
Lecture 14
Alan Matthews

2. Small open economy
In a small open economy, we can represent the rest of the world by means of a horizontal supply curve (for an importer) or horizontal demand curve (for an exporter).
The world market price represents the opportunity cost to a country of the commodities it produces or consumes

3. Example: Import tariff

4. Area c is now quota rent which accrues to exporters
Example: Import quota
Area c is now quota rent which accrues to exporters

5. Example: Export subsidy

6. Example: Deficiency payment

7. Summary Governments have a variety of ways of supporting their farmers
Border measures (either tariffs/quotas or exports subsidies depending on trade status)
Direct payments
Consumer subsidies
Input subsidies
All interventions designed to transfer income to farmers have allocation effects and thus impose a social cost on society
Ideally, given the transfer objective, the government should choose the measure with the lowest unit transfer cost/greatest transfer efficiency