Price policy interventions in a large open economy Lecture 17. Economics of Food Markets Alan Matthews

Objectives To show how countries which attempt to raise their domestic farm prices lower world market prices for everyone else To be able to incorporate terms of trade effects into the welfare analysis of farm policy interventions in the case of large countries To show how countries which attempt to stabilise their domestic farm prices destabilise world market prices for everyone else

PdPd PwPw QdQd QwQw S D ES IM P1P1 P2P2 P3P3 Q1Q1 Q2Q2 X1X1 X2X2 Q3Q3 Q4Q4 Domestic market World market Determination of excess supply and demand curves

PdPd PwPw QdQd QwQw S D ES ES* P1P1 P2P2 XQ1Q1 Q2Q2 Domestic market World market The impact of introducing an export subsidy on the excess supply curve t t

Exporter A Importer BWorld market S D ID ES Determination of world market equilibrium S D

Exporter A Importer BWorld market S D ID ES The impact of a tariff on world market equilibrium S D ID* t t PwPw P’ w

Impact of an export subsidy in a large exporting country Change in CS = -a-b Change in PS = a+b+c Change in taxpayer cost = -(b+c+d+e+f+g+gh+i) Overall welfare cost = -(b+d+ terms of trade loss) a bcd e f g h i P Q P eu PwPw P’ w D S