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The Economics of Food Markets

The Economics of Food Markets. Price/Quantity Allocation and Welfare Effects of Export Tax. Eg. Thailand’s Rice Market Tutorial: 27 th November 2007. Export Taxes and Thailand. Large producer with surpluses of rice

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The Economics of Food Markets

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  1. The Economics of Food Markets Price/Quantity Allocation and Welfare Effects of Export Tax. Eg. Thailand’s Rice Market Tutorial: 27th November 2007

  2. Export Taxes and Thailand • Large producer with surpluses of rice • Unlike many countries who must import a lot of their consumption needs, Thailand generates foreign exchange by exporting rice. • But dependence on rice has posed problems due to unstable world prices: • Rice represents large portion of national income • It’s the staple food for consumption • Government has tried to protect economy from price fluctuations by imposing tax on exports.

  3. (i) Effects of Export Tax on Thai Rice: Elastic Supply Price Price Ptw Export Supply E D Qd Pw A C F Ptd B International Demand Dd Qd Qtd Qts Qs Quantity e’ e Exports

  4. Elastic Supply of Thai Rice • Before export tax: world price = domestic price = Pw • Producers supply Qs & Consumers demand Qd • After export tax: Domestic supply falls (Qs to Qts) because producers bear part of tax, receiving a lower price, Ptd. • Producer surplus falls by A+B+C • Consumers benefit from increased consumption (Qd to Qtd) and increased consumer surplus of A+B • Conclusion: Domestic producers lose and domestic consumers gain.

  5. Elastic Supply of Thai Rice • A large part of the cost of the tax is borne by foreign customers who pay higher price • Producers effectively pay part of tax also by receiving lower domestic price, Ptd. • Total government revenue = E + F • Decline in economic efficiency represented by deadweight loss triangles B+D.

  6. (ii) Effects of Export Tax on Thai Rice: Inelastic Supply Price Price Sd Ptw Export Supply D E Pw A C F Ptd B International Demand Dd Qd Qtd Qs Quantity e’ e Exports Qts

  7. Elastic Supply vs Inelastic Supply • Thailand is a large global producer of rice －＞ domestic supply affects export supply • When supply is more inelastic, the size of deadweight loss D, is less. • Why? • Because domestic producers are less inclined to reduce supply. • Conclusion?

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