Question

(a) Explain the welfare impact of agricultural price supports if the support price is higher than the world (import) price, but the support price is below the price that would make the quantity demanded equal to the quantity supplied if there were no international trade in the commodity.

(b) Explain the welfare impact of agricultural price supports if the support price is higher than the world (export) price, and the export price is above the price that would make the quantity demanded equal to the quantity supplied if there were no international trade in the commodity.

Illustrate your answers to (a) and (b) graphically. Label the graphs

Answer 1

Answer to question no a :-

Let us understand the situation with the help of the above graph .

Equilibrium price is Ep which is higher than the support as well as import prices .

Equilibrium quantity is Eq .

If the country was importing goods the demand at Ip would have been Iqd and supply would have been Iqs. The supply gap of AB would have been covered by imports .

But there is no international trade ,thus at Sp the Producers supply at Sqs forming a new Supply curve that is QPS .But at this price the demand for goods is Sqd .

Thus DC represents Deficit demand or excess supply that is being purchased by the government.

Answer to question no b :-

In the given figure , if the market would have been at equilibrium than the Price would have been Ep and quantity would have been Eq.

If the country would have adopted for international trade then AB would have been the excess supply .

But now the government is purchasing at Sp which is higher of both Ep as well as Exp .Thus the supply curve will be QPS at which consumer will demand only SQd due to high prices which leads to low demand , but the producers will produce SOS .Thus CD Will be excess supply which will be purchased by government.