Exercise 4

Due Wednesday 2/14

Negotiations begun under GATT (the General Agreement on Tariffs and Trade) and now carried out by the WTO (World Trade Organization) have dramatically lowered tariffs and other barriers to international trade in manufactured goods. However, the reforms have generally exempted agricultural products which often remain subject to very large trade barriers, especially in developed countries. This exercise explores the issue by analyzing the current US system of restrictions on sugar imports.

Here are a few facts about the US sugar market: total annual sugar production in the US is about 14 billion pounds; annual imports of sugar are limited by federal law to 4 billion pounds; total US consumption is about 18 billion pounds; the price of sugar in the US is $0.24 per pound; the price of sugar on the world market is$0.12 per pound; the supply elasticity of US producers is 1.5; and the demand elasticity of US consumers is -0.3.

1. The key US sugar policy is the limit on imports. To see why, calculate what US production, US consumption and US imports would be in the absence of the restriction. In doing this you may assume that the supply of imports is perfectly elastic: exporters would be willing to sell any amount of sugar to the US for \$0.12 per pound. Hint: you'll need to figure out the new equilibrium price and then use the elasticities and other data to compute the requested values.
2. Now construct a diagram or set of diagrams showing the changes in consumer and producer surplus that would occur if the restriction were eliminated. You may assume that the US supply and demand curves are linear. Label the diagram(s) clearly.
3. Calculate the dollar value of the gain to US consumers from elimination of the policy, and the dollar value of the loss to US producers. Discuss these numbers briefly: Are they large or small? How do they compare to each other? How would you expect them to influence the US political debate over the policy?
4. The restriction splits sugar exporters into two groups: those lucky enough to get a license to sell part of the 4 billion pounds allowed into the US, and everyone else. What would be the effect on the first group's producer surplus of eliminating the restriction? How would the second group feel about eliminating it? Discuss.
5. How large is the deadweight loss associated with the restriction?
6. The US sugar industry has about 16,000 employees. The goal of the restriction on imports is, at least in part, to protect these jobs. Calculate how much the limit on imports costs in consumer surplus for each job saved. You can assume that employment is proportional to output: an X% drop in output will lead to an X% drop in employment.
7. Decide whether you think the import restiction is a good or bad policy for achieving its intended goals (i.e., critique the means rather than the ends). Give a brief argument in support of your position.

Please note that you do not need to calculate the slope or intercept for the supply or demand curve in order to answer these questions. It's not a typo that the equations weren't given: you can do everything you need to do just using the information above.

URL: http://wilcoxen.maxwell.insightworks.com/pages/1111.html
Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 07/09/2018