Question

Assuming the soy bean market in North Dakota is perfectly competitive and at the equilibrium, a large proportion is sold to buyers in China, use the supply and demand model to answer the following questions The Chinese government announced an increase in the tariff on the soy beans produced in the US. How does this policy affect the equilibrium of the soy bean market in North Dakota? How does it affect the welfare of farmers? If the US government announce a subsidy on the production of soy beans, how will it further change the equilibrium?

Answer 1

Currently the market is in equilibrium at P0 and Q0 where demand curve and supply curve meet. Now the Chinese government has increased the tariff on the soy beans produced in the US. This policy would increase the cost of production and supplying soy beans to China so supply curve will shift to the left. This would affect the equilibrium of the soy bean market in North Dakota by raising the price to P1 and reducing the quantity at the new equilibrium to Q1. Farmers experience a rise in price but a fall in overall quantity sold so they may face a decline in revenue if demand is sufficiently inelastic.

if the US government announce a subsidy on the production of soy beans, it will increase the production of soy beans. It is expected that the price received by domestic producers of soy beans would rise and so is their quantity sold. This indicates that their welfare is likely to improve.