The government of an importing country wants to introduce a policy to support the incomes of its farmers. It is considering making the choice between three policies. A) Import Tariff B) Import Quota C) Deficiency Payment Any policy has 3 elements 1) Objectives 2) Instruments 3) Rules for Operating

Import Tariff Taxes on Imports Frontier Level Instrument Increase in price effects both supply & demand Imports Reduced – excess demand curve shifts In contrast – no subsidy involved, generates government revenue Negative result for consumers – carry main burden

Import Quota Limits placed on quantity of imports In contrast to tariff – effect is on quantity Frontier level instrument Negative result for consumers Imports are reduced

Deficiency Payment Subsidy paid to farmers to eradicate the effects of a fluctuating lower market price Farm level instrument Domestic supply is only effected - increased by the same amount imports are reduced - similar effects to input subsidy Domestic supply becomes entirely unresponsive to changes below guaranteed price Excess demand curve shifts Demand for imports inelastic below guaranteed price Contrast – costs government money

Which is better for FARMERS?? Deficiency Payments Guaranteed minimum price Most efficient transfer – 25% cost in farmers hands Consumers not affected – only supply side But costs government money