DragIT - Intervention in agricultural markets (2)

The Common Agricultural Policy (CAP) has traditionally used high minimum prices as the means of supporting the European farming community.

The following diagram is the same as the one we had before. It shows the demand and supply for wheat in a given country. The world price of wheat is £3 per tonne (shown by the horizontal red line). Given this low price for wheat, domestic production is 15,000 tonnes per annum, yet demand is 35,000 tonnes per annum. As a result this country imports 20,000 tonnes of wheat per annum.

Drag the horizontal red line upwards to represent the setting of a high minimum price that would result in the country now having a surplus of 10,000 tonnes of wheat per annum (a surplus that is then exported).

1

Import tariff

What will be the revenue of domestic wheat farmers before the policy change?

 a) £45,000 b) £60,000 c) £105,000 d) £75,000 Yes, that's correct. Domestic production occurs where the domestic supply curve meets the world price. This is at a quantity of 15,000 tonnes. This 15,000 tonnes is sold at £3 per tonne making a total revenue of £45,000.No, that's not right. Domestic production occurs where the domestic supply curve meets the world price. This is at a quantity of 15,000 tonnes. This 15,000 tonnes is sold at £3 per tonne making a total revenue of £45,000.Your answer has been saved.

2

Import tariff

What will be the price charged after the policy change?

 a) £4 b) £5 c) £6 d) £7 Yes, that's correct. The new price will be £6. This is the new world price and at this price there will be a surplus of 10,000 tonnes.No, that's not right. The new price will be £6. This is the new world price and at this price there will be a surplus of 10,000 tonnes.Your answer has been saved.

3

Import tariff

What will be the revenue of domestic wheat farmers after the policy change?

 a) £120,000 b) £60,000 c) £125,000 d) £180,000 Yes, that's correct. Domestic production occurs where the domestic supply curve meets the world price. This is at a quantity of 30,000 tonnes. This 30,000 tonnes is sold at £6 per tonne making a total revenue of £180,000.No, that's not right. Domestic production occurs where the domestic supply curve meets the world price. This is at a quantity of 30,000 tonnes. This 30,000 tonnes is sold at £6 per tonne making a total revenue of £180,000.Your answer has been saved.

4

Import tariff

How much has consumer expenditure on wheat risen by?

 a) £180,000 b) £125,000 c) £120,000 d) £15,000 Yes, that's correct. Before the policy change consumers were buying 35,000 tonnes at a price of £3. This meant they were spending £105,000. After the policy change demand falls to 20,000 tonnes, but consumers have to pay the higher price of £6. This means they are now spending £120,000. This gives an increase of £15,000.No, that's not right. Before the policy change consumers were buying 35,000 tonnes at a price of £3. This meant they were spending £105,000. After the policy change demand falls to 20,000 tonnes, but consumers have to pay the higher price of £6. This means they are now spending £120,000. This gives an increase of £15,000.Your answer has been saved.

5

Import tariff

Assume that as a result of the policy, the world price of wheat has fallen to £2 per tonne, and that the government buys any surplus and then exports it at the world price. What will be the taxpayers contribution to this policy?

 a) £180,000 b) £60,000 c) £20,000 d) £40,000 Yes, that's correct. To buy the surplus: £6 × 10,000 = £60,000. Minus export revenues of: £2 × 10,000 = £20,000 equals a net cost of £40,000 (not including any other costs of transporting and storing etc.).No, that's not right. To buy the surplus: £6 × 10,000 = £60,000. Minus export revenues of: £2 × 10,000 = £20,000 equals a net cost of £40,000 (not including any other costs of transporting and storing etc.).Your answer has been saved.