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Price policy analysis in an open economy setting

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

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Price policy analysis in an open economy setting

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  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. 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

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