Question

The following graph shows the market for wheat in Canada, where Dc is the demand curve, Sc is the supply curve, and Pw is the free trade price of wheat. Assume that Canada is a relatively small producer of wheat, so changes in its output do not affect the world price of wheat. Also assume that Canada is currently open to free trade, and domestic consumers are able to purchase wheat at the world price with negligible transportation costs. Suppose a subsidy of $40 per ton is granted to exporters in Canada, allowing them to sell their products abroad at prices below their costs. Assume that trade restrictions are also put in place in order to prevent domestic consumers from buying wheat abroad at the world price. Use the grey line (star symbols) to indicate the world price of wheat plus the subsidy on the following graph. Then use the black point (plus symbol) to indicate the price of wheat in Canada and the quantity demanded at that price. Finally, use the tan point (dash symbol) to indicate the price of wheat received by Canadian producers with the subsidy and the quantity of wheat they will supply at that price.

Answer 1

Because I do not have access to your graph tool, I have labelling the regions which you need to shade.

(1) Before subsidy, World price is Pw (= $200). The $40 export subsidy raises price to Ps (= $200 + $40 = $240). At price of Ps, domestic consumption is Qd (= 300) and domestic production is Qs (= 900), hence exports = Qs - Qd = 900 - 300 = 600.

Loss in Consumer surplus (CS) = area PsFCPw.

Gain in Producer Surplus (PS) = area PsGEPw.

Pw+ Subsidy Q. in Canada - PRICE (Dollars per ton) - - Q in Canada - - - Loss in CS 0 150 380 450 1350 1500 Gain in PS 600 750 80 1050 1200 QUANTITY (Tons)

(b) Taxpayer Cost of export subsidy = Unit subsidy x Exports after subsidy = $40 x 600 = $24,000

(c) With free trade price Pw, Domestic consumption = 450 and Domestic production = 750.

Deadweight loss ($) = [(1/2) x 40 x (450 + 300)] + 24,000 - [(1/2) x 40 x (750 + 900)]

= (20 x 750) + 24,000 - (20 x 1,650)

= 15,000 + 24,000 - 33,000

= 6,000