Question

Over the past decade, many American candy companies, including Hershey Company, Brach’s Confections, and Ferrara Pan Candy, opened factories in Mexico and Canada to produce candy that is then shipped back to the United States for sale. Although lower wages in Mexico might explain part of this move, wages in Canada are comparable to U.S. wages.

Explain how U.S. price supports (price floors) for the sugar industry may have encouraged these moves.

The sugar industry is the longest protected in U.S. history. Many economists and industry experts argue that these protectionist policies hurt consumers and are no longer needed.

Do you agree? Why or why not? Use the concepts of supply and demand, and consumer and producer surplus to support your answer.

Explain why the U.S. sugar industry have experienced such long protectionist policies such as import quotas and subsidies?

Answer 1

Sugar prices in US has been kept exaggeratedly high over a long period of time using economic control of three-part system. Government imposes a quota on sugar production by determining a proportionate share of beet sugar and sugar cane in this production. Producers are restricted to sell up to the quota limit. Next, government imposes a two-tiered tariff. A higher tariff is imposed on producers selling higher amount than quota limit and a lower tariff is applicable on sellers selling within limit. A price of sugar is kept artificially high by restricting supply. As sugar price is very high is US, the price of candy is also high due to high input costs. Consumers are affected by this high price policy and consumer surplus is reduced by restricting their choices. Hence, some companies move to other countries like Mexico and Canada, where input costs are lower so that candies can be supplied at a lower price to the consumers.

As shown in the figure, if the government restricts quota limit of sugar production at Q1, where S1 is the supply curve and DD is the demand curve. Due to rigidity in supply, a very high price P1 is set in the market of sugar. Consumer surplus is ΔPAB and producer surplus is □PBQ1O. In the absence of tariff and quota, the price would be at P* and Q* would be the quantity of sugar supplied in the market. In that case, the consumer surplus would be ΔP*AE, which is higher than ΔPAB. This protectionist policy thus actually hurts the consumers.

This higher pricing policy for sugar is to support the sugar producers so that producers can repay government loan by selling sugar in the market