CEU lecture 1 2016
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Course of Agricultural Economics
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CEU lecture 1 2016
- 1. LECTURE 1 • Why Agricultural Economics? • Principles of welfare economics • Trade part I
- 2. Is Agricultural Economics interesting? Agriculture is a small share of GDP in developed countries, but food is one of the largest businesses in the world, it is not only farm production, but also the food industry. EU size: €1 tn turnover, 10% of manufacturing GVA Largest manufacturing sector in EU It relates to all aspects of live: Live and death – food security Food Safety and Health (obesity, nutrition, etc.) Controversial (Trade, subsidies, biotechnology, biofuels…) Very diverse …. and one gets to be invited to good food….
- 3. Why special economics? One of the most distorted, subsidised, taxed and politically affected markets… with high environmental externalities
- 4. What we will look at…. Analysis of agricultural policies in the EU and other OECD countries and their impacts WTO – measures of support Tariff and non tariff barriers EU rural development policy Agriculture in developing countries – what is the story? Climate change, food security and politics What is green?
- 5. First hard theory Welfare economics – the basis We will look at: Partial equilibrium models and look at consumer and producer surplus Ricardian comparative advantage Partial equilibrium analysis with trade Flaws and reasons for government interventions: good and bad reasons
- 6. Government intervention: what for? Infant industry argument Protect sectors of the economy Reduce income inequalities Food security Act against ‘dumping’ (or generate dumping) Food safety (phytosanitary– SPS) Environmental and public goods
- 7. Applied welfare analysis Price Quantity p q Demand BENEFIT Benefit is willingness to pay
- 8. Price Quantity p q DemandCOST Supply WELFAR E What is total welfare? Benefit (B) – costs (C) = Welfare (W)
- 9. Price Quantity p q Demand Supply CONSUMER SURPLUS Consumer and producer surplus p PRODUCER SURPLUS Welfare (W) = Consumer surplus (CS)+ Producer surplus(PS) Consumer surplus (CS) = Difference between willingness to pay and actual cost bought Producer surplus(PS) = Balance Sheet = Sales – costs = transfer from consumers - costs
- 10. Trade impacts: Exporting Price QuantityQ1 Demand Supply Pw Q2 Exports Benefit Benefit = Willingness to pay
- 11. Trade impacts: Exporting Price QuantityQ1 Demand Supply Pw Q2 Exports Cost Cost = Cost of production
- 13. Trade impacts: Exporting Price QuantityQ1 Demand Supply Pw Q2 Exports Welfare Welfare = Consumer surplus+ producer surplus = Benefit – Costs + Foreign exchange Welfare gain
- 14. Trade impacts: Importing Price QuantityQ1 Demand Supply Pw Q2 Producer loss Producer surplus Welfare gain Consumer surplus Imports = Currency Loss = cost Consumer surplus gain
- 15. No trade, government tax Price Quantity Pp Q Demand Supply Pt PRODUCER SURPLUS Consumer surplus Tax revenue Welfare= CS + PS + tax revenue Welfare loss = deadweight loss
- 16. Price Quantity Pw qs Demand Supply Pt Pt: Price with tariff qs’ qd qd’ Does tariff revenue increase welfare? Not for an importer that remains an importer. Tariff revenue
- 17. Price Quantity Pw Demand Supply Pt Pt: Price with tariff qs qs’ qd qd’ Consumer surplus lost Producer surplus win Tariff revenue ∆Welfare=Tariff revenue + producer surplus - consumer surplus loss, Tariff only covers part of the losses = transfer of consumer to producer Import fall
- 18. Price Quantity Pw qs Demand Supply Pt Pt: Price with tariff qs’ qd qd’ ∆Welfare=Tariff revenue + producer surplus - consumer surplus loss, Tariff only covers part of the losses = transfer of consumer to producer Welfare losses
- 19. Taxing exports increases welfare? No Price Quantity Pw Demand Supply Pi qsqs’qd qd’ Taxing exports is like making producer prices lower, transfer from producer to gov – no welfare gain Tax revenue of export
- 20. Taxing exports increases welfare? No Price Quantity Pw Demand Supply Pi qsqs’qd qd’ Taxing exports is like making producer prices lower, transfer from producer to gov – no welfare gain Producer surplus falls Consumer surplus up Tax revenue is not a loss, but is only a transfer from producer to gov.
- 22. Attention: Tariffs may be welfare enhancing Partial equilibrium only looks at the welfare impact on the product, but tax revenue may be invested in a product creating more welfare. It may reduce negative impacts on other sectors. There are optimum tariff too for large exporters that affect world market.
- 23. The big CAP historical controversy with the world at large The CAP was first introduced in 1968. Problem small farms, inefficient, Europe was net importer. Instead of farm restructuring, main option was price support. A) Intervention price Pi, minimum price to farmers B) Variable levy Plv: Tariff which adapts to intervention price, entry price fixed C) When intervention price higher than world price, EU subsidised the exports… which was 90% of the time the case
- 24. From underperforming to bonanza Price Quantity Pw qd Demand Supply qs 1968 Many small farms: Low farm productivity, low incomes
- 25. Why the CAP was/still is controversial Price Quantity Pw qd Demand Supply qs 1970s EU Becomes surplus producer And dumps it. Exp. subsidies Many small farms: Low farm incomes Pi Plv qs’qd’ production exp
- 26. This costs money Price Quantity Pw qd Demand Supply qs 1970s EU Becomes surplus producer And dumps it. Exp. subsidies Many small farms: Low farm incomes Pi Pvl qs’qd’ CAP expendit ure FOREx revenue
- 27. But supplier faces TOTALLY ELASTIC DEMAND Price Quantity Pw qs’’ Demand Supply qs Many small farms: Low farm incomes Pi Pvl qs’qd’ CAP expenditure FOREx revenue Supply’ Farm intensificati on Let to 1980s EU budget crisis and UK rebate… and 90s reform
- 28. Welfare? Price Quantity Pw qs’’ Demand Supply qs Many small farms: Low farm incomes Pi Pvl qs’qd’ Supply’ CS loss
- 29. Welfare? Price Quantity Pw qs’’ Demand Supply qs Many small farms: Low farm incomes Pi Pvl qs’qd’ Supply’ PS gain LOSS CAP expenditure loss
- 30. Why was world upset Price Quantity Pw Deu Seu Price Pw Pi Cut in imports + subsidised exports Pw2 Demand from Europe falls Sw Dw World supply curve shifts, more European production not responsive to Pw. Pw falls due to less Deu and more Seu Other countries cut production at lower prices, the EC ‘dumps’ the difference Sw’ Pth Europe supplies subsidised exports
- 31. CAP has reformed and eliminated price support But subsidies maintain production going World prices have however increased, the situation has changed However, the best move is to support production increases in other countries, not in expensive EU where we are at the production possibility frontier, each additional production requires costly inputs.