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 Py is the free trade price of wheat, Assume that Canada is a relatively small prpducer 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 warld price with negligible transpartation costs Suppose a subsidy of $40 per ton is granted to exporters iin 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 symbais) to indicate the world price of wheat plus the subsidy on the foowing 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 paint (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. Sc. 400 380 De P Subsidy 320 280 Qin Canada, 240 200 180 Q, in Canada 120 Loss in CS 40 Gain in PS 150 a00 450 600 250 1050 1200 1350 1500 QUANTITY (Tans) 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 export subsidy equals Using all of the previous information, compute the value af deadweight loss in Canada as a result of the export subsidy. Deadweight Loss = Loss in Consumer Surplus+Cost of Subsidy- Gain in Producer Surplus - (ua Jad saoal 3He

Answer 1

(1) The export subsidy will increase price by $40 to $(200 + 40) = $240 (= Ps). Since I cannot access your graph tool, I've marked the relevant regions.

After export subsidy,

Price = Ps

Qd = 300

Qs = 900

Loss in CS = Area PsABPw

Gain in PS = Area PsCEPw

Sc 400 360 Pw Subsidy Pc 290 in Canada A Ps 240 P B Pw in Canada 160 Loss in CS 80 Gain in PS 150 300 450 600 250 1050 120o 1350 1500 QUANTITY (Tans) PRICE (Dolilars per ton)

(2) Taxpayer cost of subsidy = $40 x (900 - 300) = $40 x 600 = $24,000

(3) After export subsidy,

Loss in CS = (1/2) x $40 x (450 + 300) = $20 x 750 = $15,000

Gain in PS = (1/2) x $40 x (900 + 750) = $20 x 1,650 = $33,000

Cost of subsidy = $24,000

Deadweight loss ($) = 15,000 + 24,000 - 33,000 = 6,000