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). The world market price represents the opportunity cost to a country of the commodities it produces or consumes

Example: Import tariff

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

Example: Export subsidy

Example: Deficiency payment

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