Question

Describe and illustrate with a graph what happens if a country that imports food decides to put stronger health and safety regulations on food imports. Specifically, what will happen to: a. Quantities produced and consumed domestically and the imported amount of food; and b. producer and consumer surpluses and the dead weight loss within the importing country, compared to unrestricted free trade. Do the same for the effect of an export subsidy introduced by a food exporting country.

Answer 1

Generally, economists divide different forms of protection measures under two subheadings, namely tariff and non-tariff barriers. Tariff barriers deal with the imposition of tax. Non-tariff barriers restrict the quantity that is imported in a country either directly (quota) or indirectly (through custom procedures, health requirements).

If a country that imports food decides to put stronger health and safety regulations on food imports, then it is employing a non-tariff barrier. In today’s context, one example of this type of non-tariff barrier was used in the case of the EU when it restricted import of beef and pork from the US on the allegation that livestock fed with growth hormone has health consequences in the long term.

Figure 1

When this regulation is imposed, the quantity imported gets restricted. In the figure 1 given above, domestic production is at Q1 when there was free trade the country. Q1Q2 units of food were imported at P1 price. After the government imposes regulations, this means the units of foods that were being imported into the country would reduce. Let's say the imports cannot exceed quantity Q3. In such a case, Q1Q3 is the amount imported. But these import restrictions lead to an excess demand of Q3Q2. As there is excess demand, the price of food would rises. This proves that as non tariff trade barriers are placed, price of food goes up.

Figure 2

Now look at figure 2 above, where F1 is initial production and F1F2 was imported. As the regulation is imposed, price rises from Pw to Pw+t. Consumer demand falls to F4. Increase in price leads to an increase in supply to F3.

a. The quantity consumed would fall by F2F4 and quantity supplied would increase by F1F3.   

b. Fall in consumer surplus = C+D+E+Z

Increase in producer surplus = C

Now, if government gives quota license to firm to purchase food at Pw and sell it at Pw+t, then E would become a part of producer surplus and deadweight loss in this case is D+Z. However, if the government does not provide this, then deadweight loss would be D+E+Z.

Effect of export subsidy on a food exporting country

Under free trade, food produced = OQ1

Food consumed = OQ2

Exports = Q2Q1

Now, the government provides an export subsidy, the export price now rises to P2, due to which supply increases to OQ3 and demand falls to OQ4. More is being exported now= Q4Q3.

Fall in consumer surplus = A+B

Rise in producer surplus = A+B+C

Government subsidy = B+C+D

Deadweight loss = B+D

Hope the answer was helpful.