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Price policy interventions in a large open economy

Price policy interventions in a large open economy. Lecture 17. Economics of Food Markets Alan Matthews. Objectives. To show how countries which attempt to raise their domestic farm prices lower world market prices for everyone else

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Price policy interventions in a large open economy

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  1. Price policy interventions in a large open economy Lecture 17. 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. 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

  4. 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

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

  6. 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

  7. 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 Pw e g i f h P’w D Q

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