Due Wednesday 2/13
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. In addition, suppose a government agency, the "Bureau of Statistics," has estimated that the supply elasticity of US producers is 1.5; the demand elasticity of US consumers is -0.3; and that in the absence of the quota, the supply of sugar by foreigners would be perfectly elastic at $0.12 per pound. Please note that you do not need to calculate the slope or intercept for the supply or demand curve in order to answer the questions below. It's not a typo that the equations weren't given: you can do everything you need to do just using the information above.
- The direct impact of the import quota is on the market supply of sugar in the US. As the first step in the analysis, please construct two market supply diagrams: case 1 for business as usual with the quota in place; and case 2 for the situation that would occur if the quota were eliminated and any amount of sugar could be imported.
- Now add the market demand curve to each diagram and find the market equilibrium price and quantity for each of the two cases.
- Next, construct a separate set of diagrams showing the changes in consumer and producer surplus that would occur if the restriction were eliminated. Please use one diagram for US consumers, one for US producers, and one for foreign suppliers. Label the diagrams clearly. What is the dollar value impact on each group? Discuss these numbers briefly: Are they large or small? How do they compare to each other? You may assume that the US supply and demand curves are linear when calculating areas.
- How large is the deadweight loss associated with the restriction?
- There are a few thousand farms growing sugar in the US. Comparing that to the number of sugar consumers, how would you expect the numbers you calculated above to influence the US political debate over the policy?
- 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.
- 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.
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Peter J Wilcoxen, The Maxwell School, Syracuse University