Agricultural Policy (ARE 120), Spring 2016

.1em;”>Agricultural Policy (ARE 120), Spring
2016

Homework #4: Due 5:00 pm, Tuesday, May
17, 2016

1.
Draw a supply and demand diagram to illustrate the economic
consequences of the European Union wheat policy. For purposes of the question,
assume the EU is a small country in the wheat market, a price taker at the
world price. Also assume that the EU would be a net importer at the world
price. Assume the target price is set far enough above the world price such
that the EU becomes a net exporter. Show the effects of introducingthe
policy on quantity produced, consumed, and traded, relative to noprogram.
Show the sign and size of the effects on welfare of European producers,
consumers, and taxpayers in terms of areas on your figure.

2.
Eccles says “over time, after their introduction, farm policies have
often been undermined as a result of evolving supply responses by producers and
evolving substitution responses of buyers (including development of alternative
technologies by manufacturers). These dynamic responses have resulted in
increasing taxpayer costs and deadweight losses, leading to requirements to
adjust the policy instruments and their settings.” Is Eccles right? Write a short
essay (no more than 250 words) discussing these dynamic responses by
economic agents and the resulting policy feedback effects, using as examples
U.S. sugar policy, U.S. tobacco policy, and U.S. and EU wheat policy.

3.
The market for cheese in a small, open economy is
illustrated in figure 1. S0 is the supply (and marginal cost) curve, D0 is the demand
curve, and the world market price is PW. Use the labels on
figure 1 to answer the following questions.

a.
In the absence of any policies, is the economy an exporter or importer
of cheese?

b.
In the absence of any policies, what is the
quantity produced =

producer price =

gross value of
production (i.e., domestic producer revenue) = quantity consumed =

consumer price =

gross value of consumption (i.e., domestic consumer expenditure) =

4.
Suppose the government fixes the domestic price
for cheese at PD per unit, and pays producers a pooled
price given by the weighted average of the domestic and export prices (as discussed
by Professor Sumner in the case of California dairy policy). The pooled price
line (representing average revenue associated with PD) is shown as ARPOOL in figure 1.
(Please note that, by construction—and even though it is not so in the figure
which is not drawn to scale—area b+e = area e+f+g+h+i+j. This is
valuable for deducing welfare areas.)

In terms of labels
on figure 1, in the presence of this policy, what is the producer price =

gross value of
production (i.e., producer revenue) = quantity consumed =

consumer price =

gross value of consumption (i.e., domestic consumer expenditure) =

5.
In terms of labels on figure 1, what is the
effect of having introduced this policy on the welfare of producers, consumers,
taxpayers, and the country as a whole

change in producer
surplus = change in consumer surplus = change in taxpayer surplus = change in
national surplus =

2

.gif”>Figure 1:A Small Cheese Exporting Economy—Effects
of Price Policies

Price (P)

a

PD

S0

b

c

d

PP

f

i

ARPOOL

e

j

h

g

PW

m

n

q

D0

r

o

z

s

u

x

w

0

//

Q1

Q2

Q3

Q4

Q5

Quantity (Q)

3

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