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Lecture notes on Agricultural Policies, EEP 131

Lecture notes on Agricultural Policies, EEP 131 - Lecture...

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1 Lecture notes on Agricultural Policies, EEP 131 September 2007
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2 Why is a section on Agriculture part of this course? Agriculture is one of the main “sticking points” in the current WTO trade negotiations (the “Doha Round”), and it was important to the formation of the WTO. Agriculture is an important component of NAFTA. The environment provides “services” that are essential to agriculture, and agricultural practices impact the environment. Policies, particularly those in developed countries, strongly influence agricultural sectors in those countries, and (via international markets) also influence agriculture in developing countries. The US is currently debating a new Farm Bill that will determine US ag policy during the next six years.
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3 Background of Uruguay Round Agriculture Agreement (URAA) Uruguay Round Agreement on Agriculture sought to bring Ag into GATT. (Discuss history, ag exemption, give examples of accidental developments, e.g. Europeans had low import restrictions on soybeans when soybeans were not an important crop in the 60s and 70s. Imports increased drastically and Europe sought to impose restrictions, which were resisted by the US) Remind students that trade restrictions cause welfare losses; countries gain by reducing their trade restrictions even if partners maintain their restrictions. Ag policies inflict costs on domestic economies and also on trade partners. Explain that a given level of producer support is more costly to achieve with tariff than with producer subsidy. Mention production and consumption distortions. Trade and domestic policies are linked; for example, maintaining a producer price higher than world price requires import barriers or export subsidies, or for govt to hold large stocks. (Mention history of EU's lakes and mountains.)
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4 Background, continued Trade restrictions may be a cheap way -- in terms of government revenue, not of social welfare -- to provide producer protection. (See next slide.) Reduction of trade restrictions increases the fiscal costs of protecting producers. Therefore, a reduction of trade restrictions may put downward pressure on domestic (non-trade) policies. (Show that if an importing country imposes a production subsidy, without a trade restriction, the government has to either buy surplus or make “deficiency payments” – the subsidy.) Payments under farm programs are capitalized into land value. This means that the farmer who is receiving current government payments may already have "paid" for them in paying a higher price for land.
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5 Suppose that the world price is pw. Under free trade, country shown in this diagram is an importer. Government wants to support producers by increasing producer price to p* > pw. (i) Show that tariff and import quota (where quota licenses are auctioned) are “equivalent”. (ii) Show that under either policy, deadweight loss is b+d. (iii) Show that if govt switches from tariff to a producer subsidy, producer price remains at p* and consumer price falls to pw. Consumers gain a+b+c+d and taxpayers lose a+b+c.
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