Price policy interventions in a large open economy

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. Determination of excess supply and demand curves Pd Pw S ES P1 P2 P3 IM D Q3 Q1 Q2 Q4 X1 X2 Qw Qd World market Domestic market

5. The impact of introducing an export subsidy on the excess supply curve Pd Pw S ES P1 t ES* P2 t D Q1 Q2 X Qw Qd World market Domestic market

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

7. The impact of a tariff on world market equilibrium D D ES t Pw t P’w S S ID ID* World market Importer B Exporter A

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) P S Peu a b c d e g i Pw f h P’w D Q

9. Impact of trade liberalisation on world markets – three country model Pus Pw Peu ESt ESus ESeu P’w Pw IMrow

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