Product Markets in PAM: Policies that Raise Prices Scott Pearson Stanford University Lecture Program Policies that Raise Prices in Agricultural Markets governments raise agricultural prices to benefit farmers approaches to study the impacts on government objectives of protecting agriculture Output Transfers in the Policy Analysis Matrix Revenues Input Costs Factor Costs Profits Private A Social E Divergences I Policy Instruments Used to Raise Prices restrictions on international trade tariffs – taxes on imports quotas – quantitative restrictions on imports subsidies to producers Effects of Trade Restrictions on the Price of Importables – Diagram Price (Rp/ton) P2 P1 h Supply a g c d O Q1 Q3 b e f Q4 Q2 c.i.f. Demand Quantity (tons) Effects of Trade Restrictions on the Price of Importables – Discussion without policy, import parity price sets domestic price at OP1 policy makers seek higher target price at OP2 trade restriction used to fill gap of P2P1 tariff (tax on imports) of P2P1 Rupiah/ton import quota of Q3Q4 tons Effects of Trade Restrictions on Quantities – Diagram Price (Rp/ton) P2 P1 h Supply a g c d O Q1 Q3 b e f Q4 Q2 c.i.f. Demand Quantity (tons) Effects of Trade Restrictions on Quantities – Discussion 1. quantities produced consumed imported no policy OQ1 OQ2 Q1Q2 trade restrictions OQ3 OQ4 Q3Q4 effects of policy Q1 Q3 ↑ Q4 Q2 ↓ Q1 Q3 + Q4 Q2 ↓ Effects of Trade Restrictions on Transfers – Diagram Price (Rp/ton) P2 P1 h Supply a g c d O Q1 Q3 b e f Q4 Q2 c.i.f. Demand Quantity (tons) Effects of Trade Restrictions on Transfers – Discussion 2. transfers producer surplus no policy P1cg P1fh ------ trade restriction P2ag P2bh abed effects of policy P2acP1 ↑ P2bfP1 ↓ abed consumer Government surplus budget Effects of Trade Restrictions on Efficiency Losses – Diagram Price h (Rp/ton) P2 P1 Supply a g c d O Q1 Q3 b e f Q4 Q2 c.i.f. Demand Quantity (tons) Effects of Trade Restrictions on Efficiency – Discussion 3. efficiency losses no policy production consumption ---- ---- trade restriction cad bfe effects of policy cad ↑ bfe↑ Impacts of Trade Restrictions on Objectives efficiency (resource allocation) equity (income distribution) food security (price stability) Trade Restrictions in the Policy Analysis Framework consist of Strategies Strategies Policies Policies work through permit evaluation of Objectives Objectives Constraints Constraints further or impede Effects of Subsidies to Producers of Importables – Diagram Supply Price (Rp/ton) P2 P1 c.i.f. + subsidy c.i.f. a d b c O Q1 Q3 Demand Q2 Quantity (tons) Effects of Subsidies to Producers of Importables – Discussion target return (OP2) = price (OP1) + subsidy ( P2P1) effects of producer subsidy quantities – production expands, consumption is unchanged, imports decline transfers – from treasury to producers efficiency losses – in production, but not in consumption limitations – feasibility, budgetary cost Policies to Raise Tradable Food Price to Producers: Summary tariff on imported food – cost paid by consumers, revenue earned by government import quota on imported food – cost paid by consumers, quota premium usually accrues to holders of import licenses Lecture Program subsidy on domestic food production – cost paid by government, not by food consumers Empirical Estimation of Product Prices tradable goods (importables, exportables) private prices – farm budgets, at farmgate social prices – border prices, at farmgate nontradable commodities private prices – farm budgets, at farmgate social prices – private prices less divergences Empirical Estimation of Social Prices for Commodities social prices of tradable commodities world price – long-run trend vs. recent exchange rate – equilibrium vs. recent social prices of nontradable commodities correct for identifiable divergences use price of close substitute use price of same commodity in neighbor
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