Question

Assume that several hundred independent farmers in Argentina are the only producers of a rare plant that is used for medicinal purposes around the world. Imagine that you are an economic adviser to the Argentine government. The president asks you to ?nd a way to capture some of the economic rents from the production of this rare plant, so that more pro?ts stay in Argentina. Your job is to design a trade policy that accomplishes the president’s goal. Explain verbally what your trade policy would be, how it would a?ect quantity and price in the market, and how it would a?ect all the players in this market.

Answer 1

First let us understand what is meant by economic rent and how profits can be increased from them.

Definition: Economic rent can be defined as the payment to a unit of a factor of production in excess of the costs needed to bring that factor into production. eg. land and labour.

     Economic rent can also be increased through patents and permits. Economic rent also arises due to a scarcity of natural resources in our case the rare medicinal plant.

Profits result when selling prices of the goods exceeds their cost of production.
The changes because of which profirs arise in a dynamic economy can be also be classified as - Innovations and exogenous changes.

1) Innovations: Large profits can be earned by introducing innovations like a new and cheaper method of production, a new method of production and advertisement.

2) Exogenous changes: Are external to the firms in an economy. eg. changes in monetary and fiscal policies of the government, changes in technology of production etc.

We can impliment the following trade policy in order to capture some of the economic rents from the production of this rare plant, and more profits stay in Argentina:

However, when a country is large in international markets, domestic policies will affect prices, production levels, profits, and welfare, both domestically and internationally.

- Production subsidy: We should impliment domestic production subsidy, it will encourage farmers to produce more. It will raise the price producers receive when they sell their good, but it will not affect the price for domestic consumer and all the excess production will be exported, thus increasing the countries exports and increase in foreign exchange reserves.

- Export subsidies: We can also give export susidy to the exporters, which will again reduce the cost of exports and increase their profits.

- Agriculture subsidy: Providing agriculture subsidies on electricity, fertilisers, irrigation and farm tools and instruments will also help in reducing the cost of production for the farmers and also increase the total productivity and production of the rare medicinal plants. Increased profits will also attract more land to be brought under cultivation and increase output of the medicinal pland, thus increasing exports.

- Marketing and Advertisement: Government should undertake marketing and advertising campaigns in international markets to increase the demand for the medicinal plant in international markets. It will also help in capturing new markets.

- Research and Development: Providing funds for R & D to find new medicinal uses of the plant and produce new products for exports. It will also help in increasing profits from its production.

- Patent: Getting a patent for the production of the plant will greatly increase the profits of the domestic producers. Although it will increase the price in international market, but since it is not produced anywhere else it will not affect its demand.

- Thus the above policies will help to increase production on a large scale while reducing the cost of production and thus increasing profits from economic rents. Finding new products and new markets will increase its demand in inetrnatuonal market. Providing agricultural and export subsidies will help reduce the prices in the international market and it will thus increase the demand.