Price policy analysis in a closed economy setting

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

2. 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

3. 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.

4. Example: Specific consumer subsidy on flour P S Pp b a P0 e Value of specific subsidy c d f Pc D1 g D0 Q0 Q1 Q

5. Example: Ad valorem consumer subsidy on flour P D1 S D0 Pp a b P0 e Value of ad valorem subsidy c d f Pc g Q0 Q1 Q

6. Example: Fixed direct payment per tonne to producers P S0 S1 Pp a b P0 e Value of fixed payment c d f Pc D Q0 Q1 Q

7. Example: Unit fertiliser subsidy S0 P S1 P0 f a b c Pm g d e D Q0 Q1 Q

8. Example: Production quota with efficient allocation of quota reductions

9. Example: Production quota with proportional allocation of quota reductions