Impact of Export Subsidy on Market Prices of Beef in Australia and Canada

Australia now can export beef to Canada due to free trade agreement (Sun 2015). Under this scenario, answer the given question 1 are as follow:

a) According to the question, if the government of Australia subsidise its beef supply, then the cost of exporting beef will fall (Tebaldi 2017). It will enhance the demand of the Australasian beef in Canada due to reduced price, which is the direct outcome of the export subsidy provided by the Australian government. On the other hand, there will be scarcity of beef in the domestic market of Australia, leading to a rise in price of the beef in the market (Ding et L, 2014).

According to the figure 1, Q₀ was the initial equilibrium quantity of Australian beef and P₀ was the initial equilibrium price. With rise in export subsidy, Output will rise to Q₁ and the price for the Canadian market will fall to P_C. However, the price for beef in the Australian market will rise to P_A, which is higher than the equilibrium price (McGovern 2017).

b) In order to find the consumer surplus, total surplus and government revenue we have to consider the diagram 2. According to the diagram, P is the equilibrium price, if there is no trade between the countries.

Post subsidy, price of the beef in the Australian market will hike up to the P_A and the price in Canadian market will be P_C. This price rise in Australian market will lead to a fall in Consumer Surplus by (A+D); whereas the producer surplus will increase up to the level of (A+D+F) due to increased sell in the Canadian market. This entails that consumer surplus during post subsidy will increase and it will affect the total surplus, which can be gained through producer and consumer surplus. Combining this we can perceive that total surplus is [{(A+D+F) – (A+D)} = F]. On the other hand, government revenue from the beef export will fall during post subsidy period due to excess expenditure as the form of subsidy (Stiglitz and Rosengard 2015). Government revenue can be represented by (C+D+E+F+G+H), which is lower than the pre subsidy period.

c) Import quotas are one of the tools that aid the government to put restriction on the import and enhance the production of the domestic suppliers.

If the Canadian government put import quota on beef production, then it will restrict beef export from Australia to Canada (Abbassi, Tamini and Dakhlaoui 2015). Considering that pre quota price of beef in the Australian market is P₀, we can envisage that post quota price will rise to P₁. It will lead to fall in demand and supply of beef as well and a loss of consumer surplus by (A+B+C+D) amount. In this case, deadweight loss will be (A+B+C) and the D section represents the foreign supplier’s profit.

Analysis of Consumer Surplus, Total Surplus, and Government Revenue

d) Trade protection is one of the tolls for the government that aids to protect the interest of the domestic producers and enhance domestic output level (Shatz, Howard and David 2017). It provides the domestic producers competitive advantage in the domestic market with favourable condition to compete with the international traders (Schuknecht 2017). Trade protection increases government revenue and aids the foreign reserves of the country. Two arguments in favour of the trade protection act are as follows:

Infant industry argument: It is aimed to safeguard the interest of the infant industries by curtailing the stiff competition from the players of the world market. Theoretically, it aids the firm to enhance their productivity and transform them to become potent enough to compete with the foreign players (Charles 2017).

Business diversification: Country, which has immense specialization in production of goods, and then they tends to be dependent on other nations for other products and services. This hampers the country’s economic interest (Hill, Jones and Schilling 2014). Thus, business diversification argument proposes that countries need to diversify their business and transform them to become self-reliance in long run.
Answer 2:

a) Given that market price for 2 unit of the product is 40; however, the Marginal Cost of production is 30, which means the firm is willing to sell 2 units of their product at 30 unit of price.

Thus the producer surplus is = 40 – 30 = 10 Units.

b) The firm is willing to sell 3 units of their products at 50 unit of price. Given that, the market price of the 3 units of the same product is 60.

Thus the producer surplus is = 60 – 50 = 10 Units. 

Given that:

Demand function is: Q^D = 200 -2P

Supply function is: Q^S = -10 + P

a) Inverse demand function is the representation of the demand function, where quantity is function of the price (Sun et al. 2017).

In this case Inverse demand function is:

Q^D = 200 -2P

Q^D + 2P = 200

2P= 200 – Q^D

P = 200/2 –Q^D/2

P = 100 – Q^D/2

Inverse supply function is the representation of the supply function, where quantity is the function of price (Van et al. 2014).

In this case Inverse supply function is:

Q^S = -10 + P

P = Q^S + 10

b) Inverse demand and supply function is considerably same as the regular demand supply function. It is drawn taking output in the horizontal axis and price in the vertical axis (Varian 2014).

Policy Options for Enhancing Domestic Production

c) Calculation of equilibrium quantity, price can be done considering that, the market is in equilibrium.

Therefore, Q^D = Q^S

200-2P = -10 + P [Putting the given equations of supply and demand]

2P+P= 200+10

3P=210

P=210/3

P=70

Therefore, the equilibrium price of orange is 70 for each unit.

Now to trace the equilibrium quantity of orange, we have to put the equilibrium price in demand equation.

Q^D = 200 -2P

Q^D= 200-2*70

Q^D= 200-140

Q^D= 60

Therefore, the equilibrium quantity of orange is 60 units.

d) Consumer surplus can be calculated using the inverse demand function and considering the demand is null. First, we have to calculate the maximum willingness to pay for each unit of apple and then using the formulae of triangle we have to find the consumer surplus (Arent et al. 2014).  

Maximum willingness to pay P = 100

Consumer surplus = ½ X base X height [Base is quantity demanded and height is price difference between equilibrium price and maximum willingness to pay]

= ½ X (100 – 70) X 60

= 30 X 60

= 1800

Therefore, consumer surplus is 1800.

Producer surplus can be calculated using the inverse supply function and concurring that there is no demand of the product in the market. First, we have to calculate the minimum willingness to produce for each unit of apple and then using the formulae of triangle we have to find the producer surplus (Kato 2017).  

Minimum willingness to produce P = 100

Producer surplus = ½ X base X height [Base is quantity demanded and height is price difference between equilibrium price and maximum willingness to pay]

   = ½ X (70-10) X60

   = 60 X 60

  = 3600

Therefore, producer surplus is 3600.

a) Alcopops being addictive are highly inelastic to price change. With taxation, government tried to reduce the supply of the product as displayed in figure 4 (Elliot Joshua and Don 2014). This has effectively enhanced the price of the product from P0 to P2, however due to inelastic t the price level the quantity demanded would not fall to Q1.

This rise in price was expected to increase the government revenue, however the lag between predicted and the actual revenue generation from the tax is surprising.

b) Alcopos being addictive productive, is highly inelastic to price changes. Post taxation will enhance the price from P₀ to P₁; however, the producer receives only P₂.

With high inelasticity with price, Alcopos demand will not fall from Q₀ to Q₁, and thus total tax burden will shifted from producer to consumer leading to lowered consumer surplus, producer surplus and higher deadweight loss, making the tax imposition ineffective.

c) Imposition of tax is not beneficial for highly inelastic good (Kaplan, Taylor ad Villas 2016). Thus, it would be better for the government to impose quota system in the case of Alcopos. However, there is scope of black-marketing the product and monitoring is tough in this case. Thus, government should take social reform program to bring in awareness about the bad effects of the Alcopos. Restricting the legal age for having Alcopos will be beneficial and import tariffs can also be beneficial in this case.

Reference:

Abbassi, A., Tamini, L.D. and Dakhlaoui, A., 2015. Import quota allocation between regions under Cournot competition. Economic Modelling, 51, pp.484-490.

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Charles, L., 2017. A new empirical test of the infant-industry argument: the case of Switzerland protectionism during the 19th century (No. 2017-11). Groupe de Recherche en Economie Théorique et Appliquée.

Ding, Z., Sarikprueck, P., Lee, L., Lee, W.J., Shi, J. and Lu, H., 2014, September. Financial opportunities for LSE under scarcity price environment. In North American Power Symposium (NAPS), 2014 (pp. 1-6). IEEE.

Elliott, J. and Fullerton, D., 2014. Can a unilateral carbon tax reduce emissions elsewhere?. Resource and Energy Economics, 36(1), pp.6-21.

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Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

Sun, C.H.J., Chiang, F.S. and Squires, D., 2017. More Landings for Higher Profit? Inverse Demand Analysis of the Bluefin Tuna Auction Price in Japan and Economic Incentives in Global Bluefin Tuna Fisheries Management (No. 1701).

Sun, K., 2015. China-Australia Free Trade Agreement: Implications for Canada.

Tebaldi, P., 2017. Estimating equilibrium in health insurance exchanges: Price competition and subsidy design under the aca.

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