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

Reading suggestions Either the Ellis or Colman and Young texts have chapters on price policy analysis Also the Gaisford and Kerr book has diagrams for open economy analysis

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

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 intervening in agricultural markets –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