Question

multi part question

4. Agricultural export subsidies in a small nation 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 t that trade restrictions are also put in place in order to prevent domestic consumers from buying wheat abroad at the world price. their products abroad at prices below their costs. Assume 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 use the tan point (dash symbol) to indicate the price of wheat indicate the price of wheat in Canada and the quantity demanded at that price. Finally, received by Canadian producers with the subsidy and the quantity of wheat they will supply at that price. ? Sc 400 360 Dc P Subsidy + W 320 280 in Canada 240 P. 200 160 Q in Canada 120 80 Loss in CS 40 Gain in PS 900 1050 1200 1350 1500 450 600 750 150 300 QUANTITY (Tons) PRICE (DollarS per ton) ]] Export subsidies result in a welfare loss to the home country due to the protective and consumption effects. In order to determine the magnitude of these effects, you must compare the change in consumer and producers surplus against the cost of the subsidy. On the previous graph, use the green quadrilateral (triangle symbols) to indicate the loss in consumer surplus due to the export subsidy. Then use the purple quadrilateral (diamond symbols) to indicate the gain in producer surplus as a result of the export subsidy. The taxpayer cost of the exportrt subsidy equals S Using all of the previous information, compute the value of deadweight loss in Canada as a result of the export subsidy. Loss in Consumer Surplus + Cost of Subsidy-Gain in Producer Surplus Deadweight Loss -

Answer 1

Price (Dollars pertom) 360 Sc 320 DC 290 -fnt subsioy Pw C D A 200 12c ys0 00 750 0o loSo 120o 1350 1S00 Quantity(ton) 300

In the above diagram, we have shown the demand and supply diagram for the given problem. Here, demand and supply curves are denoted as D_c and S_c respectively. P_w is the world price. Now, with an export subsidy of $40 per ton the, new world price becomes $240 per ton. Due to export subsidy, level of net export increased from 300 tons to 600 tons.

Due to increase in world price, consumers earns losses. Here, area (A+B) denotes net loss in consumer's surplus. Here, the value of loss in consumer surplus = area of a trapezium = 1/2*(sum of lengths of parallel sides)*height = 1/2*(300+450)*40 = $15,000

However, in this case, producers earns profits. Here, area (A+B+C) denotes net gain in producer's surplus. Here, the value of gain in producer surplus = area of the trapezium = 1/2*(sum of lengths of parallel sides)*height = 1/2*(750+900)*40 = $33,000

Here, the taxpayer cost of subsidy is denoted by the the area (B+C+D).Now, cost of subsidy = area of a rectangle = length * breadth = 600*40 = $24,000

Then, dead weight loss = Loss in consumer surplus + cost of subsidy - gain in producer surplus = Area (A+B) + Area (B+C+D) - Area (A+B+C) = Area B + Area D = area of triangle A + area of triangle B = 1/2*base*height + 1/2*base*height = 1/2*150*40 + 1/2*150*40 = $6,000