1. Price policy interventions in a large open economy Lecture 23 Economics of Food Markets Alan Matthews

2. 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

3. Reading McCalla and Josling article

4. 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

5. 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

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

7. 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

8. 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

9. Impact of trade liberalisation on world markets – three country model P us P eu PwPw ES us ES eu ES t IM row PwPw P’ w

10. Impact on world market price instability Policies which stabilise domestic prices destabilise world market prices Examples: EU variable levy system Specific vs ad valorem tariffs

11. Summary protection in (large) countries raises their domestic prices but lowers world prices stabilising domestic prices destabilises world prices net exporting countries lose because of protection in third countries because of the terms of trade effect net importing countries gain because of protection in third countries because of the terms of trade effect