ARE120%20LN06~2008

ARE120%20LN06~2008 - ARE 120 Spring 2008 Julian Alston...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ARE 120 Spring 2008 Julian Alston April 22, 2008 Lecture 6 REDISTRIBUTION THROUGH COMMODITY PROGRAMS Reading: This lecture is based partly on The Incidence of Agricultural Policy, by J. Alston and J. James, published in the Handbook of Agricultural Economics . Outline: 6. Efficient Redistribution 6.1 Comparing a Quota and a Subsidy 6.2 Transfer Efficiency 6.3 Surplus Transformation Curves 6.4 Other Issues 6.5 Qualitative Differences among Policy Instruments 1 6.1 Comparing a Quota and a Subsidy MOTIVATION Recall, the objectives of policy analysis may be to describe policy impacts to prescribe optimal policies to predict policy choices Regardless of the objective, questions have changed from What is the best policy to correct market failure? to What is the best policy for redistributing income? For understanding or prescribing policy, the focus has shifted from efficiency (considering only the deadweight losses from transfers), to distributional effects (or incidence) as well as efficiency. EFFECTS OF QUOTAS AND SUBSIDIES RECONSIDERED Figure 6.1 compares the welfare effects of a quota and a subsidy. In figure 6.1, D represents demand, S represents supply, and the initial equilibrium occurs at P and Q . A higher price, P 1 , for producers is achieved either by fixing a quota of Q 1 , or by fixing a producer target price at P 1 , allowing the corresponding production of Q 2 to be sold at a consumer price, P 2 , and paying producers a deficiency payment of P 1-P 2 per unit. (The latter is identically equivalent to paying producers a per unit subsidy of P 1-P 2 ). Both policies result in the same fair producer price of P 1 , but the quota reduces the quantity produced and consumed to Q 1 , while the subsidy increases it to Q 2 . The welfare effects differ too, especially the effects on consumers and taxpayers. The quota policy benefits producers at the expense of consumers, with no effect on taxpayers. The subsidy policy benefits consumers as well as producers, all at the expense of taxpayers. Producers benefit more from the subsidy: PS s = area A+B+C > PS q area A-(G+K). Table 6.1: Welfare Effects of a Quota and a Subsidy Marketing Quota Production Subsidy Producer Surplus ( PS) A - (G+K) A+B+C Consumer Surplus ( CS) - (A+B) F+G+H+I Taxpayer Surplus ( TS) 0 - (A+B+C+E+F+G+H+I) National Surplus ( NS = -DWL) - (B+G+K) - E NET SOCIAL COSTS (DWL = - NS) The net social costs are DWL q = area B+G+K and DWL s = area E. Both increase with increases in either the absolute value of the elasticity of demand (...
View Full Document

Page1 / 8

ARE120%20LN06~2008 - ARE 120 Spring 2008 Julian Alston...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online