The following information pertains to the market for ginseng in a country that engages in international trade. The country can be considered a “small” country relative to the international market for ginseng. The long run domestic supply curve for ginseng is –320 + 10P. The short run domestic supply curve for ginseng is Qs = 2P. The domestic demand curve for ginseng is Qd = 365 – 3P. Ginseng production has experienced a considerable degree of technological change in the last few years. Some very progressive farmers (approximately 20 percent of the farms) have been able to use the new technology very effectively. The remainder of the farmers have not been able to adopt the new cost-reducing technology. Thus, there are two types of ginseng farms – Efficient Farms and Inefficient Farms. The following is some production data pertaining to each farm type. (NOTE – the quantities associated with the farms are of different unit magnitudes – a different scale – than the quantities associated with the market information given above)
The new technologies associated with ginseng production have had wide adoption internationally. The result is that the world price (Pw) of ginseng has recently declined as global production has increased due to the technological change. The current world price appears to have stabilised at 40.00 currency units. The current and future interest rate is 7.5 percent.
(a) Calculate the one period profits or losses of the Inefficient Farm at the current world price (show all calculations in this and each of the sections below)
(b) At the current world price, is the Efficient Farm making a normal rate of return? Why or Why not?
(c) If the government wished to support the incomes of inefficient farmers with a trade policy intervention in the short run, would a tariff or an export subsidy be the correct policy? Why or Why not?
(d) As public policy should not be used to provide a higher than normal rate of return to the target group, what is the size of the tariff or export subsidy that would have to be implemented by the government to prevent Inefficient Farms from leaving the industry in the long run? Why? (e) Calculate the value of the short run change in consumer surplus that would arise from the imposition of the tariff or export subsidy you suggest in section (d).
(f) Calculate the short run change in government revenues or expenditures that would arise from the policy.
(g) Calculate the value of the short run change in producers surplus that would arise from the imposition of the policy.
(h) Calculate the value of the short run change in total welfare as a result of the imposition of the policy.
(i) Calculate the value of the short run dead weight loss arising from the imposition of the policy.
(j) Calculate the one period profit or loss that Efficient Farms would experience as a result of the imposition of the policy.
(k) If the trade policy was expected to be in place in perpetuity, calculate the increase in the value of the fixed assets of Efficient Farms that can be expected to result from the policy.
(l) If additional land suitable for efficient ginseng production is available, what would you expect to happen over the long run? Why?
(m)Assume this market moves to a long run equilibrium over time and the government adjusts its policy to reflect the change; i.e. keeping the price high enough to prevent exit of Inefficient Farms, what will be the quantity of ginseng imported or exported?
(n) Calculate one period government revenues or expenditures in long run equilibrium.
(o) What is the effect on consumers surplus of moving from the short to the long run? Explain. (p) Assume that at the WTO there is a proposal put forward by traditional ginseng exporting countries to cut support to ginseng farmers by 5 currency units per quantity, calculate the effect of this change on the value of fixed assets of Efficient Farms. What would you expect an association of Efficient Farmers to advise the Ministers of Agriculture and Trade regarding the proposal?
(q) Would efficient farmers who entered the ginseng industry in the period after the policy was imposed be expected to support the proposed change in trade policy outlined in section (p)? Explain.
(r) What would be the effect on Inefficient Farms of the proposed change in the trade policy outlined in section (p).
(s) Would you expect that farmers would have allies in a lobbying effort to keep the trade policy in place? Who would they be and why would they support retention of the trade policy?
(t) Would you expect a strong consumer lobbying effort regarding the proposed change in trade policy outlined in section (p). Explain
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