4.2 (Global economy) Trade protection: Production subsidy: Importing nation: 2 Versions of a Subsidy скачать в хорошем качестве

4.2 (Global economy) Trade protection: Production subsidy: Importing nation: 2 Versions of a Subsidy

Video tutorial for IB Economics students illustrating how to draw, analyze, and evaluate how the agricultural industry (wheat) for nations within the European Union is impacted by a per unit production subsidy (Common Agricultural Policy (CAP)). CAP: https://en.wikipedia.org/wiki/Common_... Trade Protection Playlist:    • Global economy: Types of trade protection:...   Note: IB Econ Paper analysis of the economic model --- Analysis Graph A: EU Cereal Industry (importing nation): Version 1 (time 5:30) x-axis measures Qs & Qd of wheat y-axis measures the price of wheat Sd (law of supply) = the sum of all firms in the industry that produce wheat = domestic supply of wheat Sd: PES is less than 1 (inelastic) due to length of time to plant & harvest wheat Dd (law of demand) = the sum of all firms in the industry that demand wheat as an input in their production = domestic demand of wheat Dd: PED is less than 1 (inelastic) due to no close substitute for firms that demand wheat as a key input in their production Sd=Dd (point A), provides an equilibrium domestic price & quantity (Qs=Qd) The EU opens to world trade (it engages in free trade) and accepts the world price (Pw) Pw (perfectly elastic world supply curve) is less than the equilibrium domestic price, thus EU domestic wheat producing firms will reduce the Qs to Q1 (point B) (some productively inefficient wheat producing firms will shut down and exit the domestic and global industry since they do not have the comparative advantage due to higher production costs, this will also lead to increased unemployment in the domestic wheat industry) Pw is less than the equilibrium domestic price, thus EU firms that demand wheat as an input in their production process will increase their Qd to Q3 (point C) (these firms can increase the production of their output which will generate more employment in their industry) At Q3, MB = MC, thus, global allocative efficiency is achieved Qd is greater than Qs, thus the EU will import by the quantity of Q3 - Q1 The EU (via the Common Agricultural Policy) impose a per unit production subsidy as a means to protect the domestic wheat industry from foreign competition (as a result of national & food security concerns) Per unit production subsidy applied Sd1 to Sd2 = (Sd1 - subsidy), thus price is not impacted and remains at Pw Domestic Qd is not impacted (point C) Domestic Qs increases as a result of the increased price received by producers (Pw to Pw + subsidy) from Q1 to Q2 (point B) At Pw + subsidy, Qd at Q3 is greater than Qs at Q2, thus the EU imports the quantity of wheat of Q3 - Q2 Note: IB Econ Paper evaluation for the economic model (time 14:14) --- Evaluation The following provides an evaluation of the per unit production subsidy's impact on stakeholders 1. Consumers are not impacted as price remains at Pw Consumer surplus before the tariff is areas a + b + c + d + e Consumer surplus after the tariff is areas a + b + c + d + e No change in consumer surplus Since consumer surplus is not impacted, this enables consumers to continue to spend in other industries in the domestic economy leading to sustained total revenue and profit for those firms, as well as sustained employment in those industries 2. Producers are better off as their producer surplus and total revenue is increased as a result of the increase in price from Pw to Pw + subsidy Producer surplus before the tariff is area f Producer surplus after the tariff is areas f + b (f + b) is greater than f TR1 (before tariff) = Pw x Q1 TR2 = (Pw + subsidy) x Q2 TR2 is greater than TR1 4. Workers in the EU cereal grain industry are better off since there is increased Qs by domestic wheat producers from Q1 to Q2 leading to increased employment by wheat firms of factors of production such as labor 5. The government loses with the applied production subsidy as they must spend tax revenue = b + c = ( (Pw + subsidy) - Pw ) x Q2 ; thus an opportunity cost is generated The government gains political support from domestic firms & workers within the wheat industry The domestic government will have created political tension with the government's of exporting nations that have been negatively impacted by the production subsidy (reduced exports by the firms in those exporting foreign nations) 6. Foreign firms are negatively impacted by the production subsidy Reduced imports in the EU results in reduced exports for foreign nations with productively efficient wheat producers, this will also lead to rising unemployment in the wheat industry of those foreign nations 7. Global allocative efficiency is negatively impacted as at Q2, MC is greater than MB, which generates and overallocation of resources to the production & consumption of wheat in the global and domestic economy (welfare loss of area c) Welfare loss of area c = increased output by productively inefficient EU firms