AGEC 429: AGRICULTURAL POLICY LECTURE 14: USING ELASTICITIES FOR POLICY ANALYSIS I

Transcription

1 AGEC 429: AGRICULTURAL POLICY LECTURE 14: USING ELASTICITIES FOR POLICY ANALYSIS I

2 AGEC 429 Lecture #14 USING ELASTICITIES FOR POLICY ANALYSIS I Price elasticities of demand and supply are extremely useful for analyzing the effects of policy changes on market supply, demand, and prices. We will assume that price elasticities are known. But actually, elasticities must be calculated from statistical, econometric analysis (regression).

3 ELASTICITY REVIEW Formula for any price elasticity: Q i E i where i D or S ( or ) P Three components of the formula: (1) the price elasticity of supply or demand (E i ) (2) the % change in quantity supplied or demanded ( Q i ) (3) the % change in price ( P ). The key to the analysis is to understand that if you know 2 of these three things, then you calculate the third using the formula above. So, if you know the price elasticity and you know the percent change in quantity, you can calculate the percent change in price. Or if you know the elasticity and the percent change in price, you can calculate the percent change in quantity.

4 In other words, if you know E i and P, then from Q i E i P Or if you know E i and Q, the you can calculate: P Q i / E i ELASTICITY REVIEW (Cont d) E i For each of the general policy tools, we will do the following: you can calculate: 1. Calculate the missing information and fill in the appropriate blank with that information. 2. On each graph, show the new levels of quantity supplied and/or demanded for the given elasticities. We will shade in the areas representing government costs. You should be able to identify the appropriate areas of each graph that represent the changes in producer and consumer surplus (welfare), government costs, and the net social welfare as a result of each policy. We did this at the end of the last lecture. Since this is Texas, we will use cotton as the commodity for our analysis. Q i P

5 Government Surplus Purchase Program 4 1,7 Q D E D P Q D Q D Assume E S.4 and E D -.86 Gov t Cost To support farm price, assume the government implements a surplus purchase program at a loan rate of /lb. The graph shows current price and quantity. WHAT IS THE PROGRAM COST?

6 Domestic Expansion Program 4 1,7 New Q S E S P Q S Assume E S.4 and E D -.86 Q S To support farm price, the government implements a demand expansion program to raise market price to the support price level of /lb. The graph shows current price and quantity.

7 New Mandatory Acreage Reduction 4 1,7 Assume E S.4 and E D -.86 Q D E D P Q D Q D To support farm price, the government implements a mandatory acreage reduction program to raise market price to the support price level of /lb. The graph shows current price and quantity.

8 New Mandatory Marketing Quota Program 4 1,7 Assume E S.4 and E D -.86 Q D E D P Q D Q D To support farm price, the government implements a mandatory marketing quota program to raise market price to the support price level of /lb. The graph shows current price and quantity.

9 Marketing Loan Program (Coupled Revenue Support Payment) /lb 4 1,7 P Q D / E D P M Assume E S.4 and E D -.86 To support farm revenue, the government implements a Marketing Loan Program with a NR loan rate of /lb. The graph shows current price and quantity. GC GC GC (P L - P M ) Q* e

10 Price Loss Coverage Program (Coupled Revenue Support Payment) (Case of P M > P L ) 4 2 1,7 GC (P R - Max (P M,P L )) Q* e GC GC Assume E S.4 and E D -.86 Assume that the Reference Price is set at /lb and the NR loan rate is set at a low safety net level of 2 /lb, how would the cost compare to the other programs? Note: The 2 /lb loan rate (P L ) does not come into play in this case because.

11 Combined Price Loss Coverage and Marketing Loan Payment Programs (Case of P L > P M ) Why is this the same as for the two previous cases of PLC alone and MLP alone? % 1,7 Assume E S.4 and E D -.86 How does the Government Cost change with changes in the loan rate? GC PLC + MLP PLC (P R - Max (P M,P L )) Q* e PLC MLP (P L - P M ) Q* e MLP GC Assume that the Reference Price is set at /lb and the NR loan rate is set at a higher safety net GC level of 3 /lb, how would the cost compare to the two previous cases of just a PLC or a ML program?

12 Combined Price Loss Coverage and Marketing Loan Payment Programs (Case of P L > P M ) The GC DOES NOT CHANGE! Why? 5 4 1,7 Assume E S.4 and E D -.86 How does the Government Cost change with changes in the loan rate? With a combined Price Loss Coverage program and Marketing Loan program with a Reference Price of /lb, what would happen if the Loan Rate was raised to 5 /lb? GC PLC + MLP PLC (P R - Max (P M,P L )) Q* e PLC MLP (P L - P M ) Q* e MLP GC GC