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Japanese rice producers have extremely high production costs in part due to the high opportunity cost of land and to their inability to take advantage of economies of

Japanese rice producers have extremely high production costs, in part due to the highopportunity cost of land and to their inability to take advantage of economies of large-scaleproduction. Analyze two policies intended to maintain Japanese rice production: (1) a perpoundsubsidy to farmers for each pound of rice produced, or (2) a per-pound tariff onimported rice. Illustrate with supply-and-demand diagrams the equilibrium price andquantity, domestic rice production, government revenue or deficit, and deadweight lossfrom each policy. Which policy is the Japanese government likely to prefer? Which policyare Japanese farmers likely to prefer?Figure 9.3.a shows the gains and losses from a per-pound subsidy with domesticsupply, S, and domestic demand, D. PS is the subsidized price, PB is the price paid bythe buyers, and PEQ is the equilibrium price without the subsidy, assuming no imports.With the subsidy, buyers demand Q1. Farmers gain amounts equivalent to areas Aand B. This is the increase in producer surplus. Consumers gain areas C and F. Thisis the increase in consumer surplus. Deadweight loss is equal to the area E. Thegovernment pays a subsidy equal to areas A + B + C + F + E.Figure 9.3.b shows the gains and losses from a per-pound tariff. PW is the world price,and PEQ is the equilibrium price. With the tariff, assumed to be equal to PEQ - PW,buyers demand QT, farmers supply QD, and QT - QD is imported. Farmers gain asurplus equivalent to area A. Consumers lose areas A, B, C; this is the decrease inconsumer surplus. Deadweight loss is equal to the areas B and C.http://ingesolucionarios.blogspot.comhttp://ingesolucionarios.blogspot.comChapter 9: The Analysis of Competitive Markets122PriceQuantitySDPBPEQPSACBEFQEQ Q1Figure 9.3.aPriceSDPEQPWA B CQD QEQ QT QuantityFigure 9.3.bWithout more information regarding the size of the subsidy and the tariff, and thespecific equations for supply and demand, it seems sensible to assume that theJapanese government would avoid paying subsidies by choosing a tariff, but the ricefarmers would prefer the subsidy.

May 16 2020 View more View Less

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