ECON101 Chapter Notes - Chapter 6: Production Quota, Marginal Cost, Deadweight Loss

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browncrocodile545

9 Oct 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Corey Van De Waal

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ECON101 Full Course Notes

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Governments often use two other methods of intervention in the market for farm products: Production quota: an upper limit to the quantity of a good that may be produced in a specified period. I. e. suppose that the dairy farmers want to limit total production of milk to get a higher price. They persuade the government to introduce a production quota on milk. If the government introduced a production quota above the equilibrium quantity, nothing would change: b/c dairy farmers would already be producing less than the quota. If a production quota set below the equilibrium quantity ha big effects, which are: a decrease in supply, a rise in price, a decrease in marginal cost, inefficient underproduction, an incentive to cheat and overproduce. A production quota on milk decreases the supply of milk. The total of the g(cid:396)owe(cid:396)s" limits e(cid:395)uals the (cid:395)uota. And any production in excess of the quota is illegal.

Related Questions

For years the U.S. dairy industry has claimed that Canadian dairy producers are heavily subsidized through the countryâs supply management program. This argument has been a key point in trade negotiations as the U.S. claims that the supply management system, and the Class & pricing system in place, creates an unfair playing field. In a new report, Canadians have suggested that perhaps the U.S. dairy industry should examine its own subsidy programs before making accusations. The 588-page report commissioned by Dairy Farmers of Canada examined the role subsidies play in the U.S. dairy market. According to the report, 73% of the returns received by U.S. dairy farmers in 2015 were a result of dairy farm subsidies, such as the Margin Protection Program (MPP), the Supplemental Nutrition Assistance Program (SNAP) and others. That amounts to about $12.06 per cwt. âOne of the things we are seeing is that the way dairy industries are supported on both sides of the border are different,â Haney says. âCanada on the front end, is clearly supported through the quota system. In the U.S., itâs more through other means like MPP, SNAP and so forth.â âThe Canadians should realize that the U.S. is not over subsidized, but has a tremendous safety net that will give larger producers confidence to expand production knowing they have revenue assurance and other industry backups,â Wiesemeyer says, especially with the update to programs recently announced in the newly approved spending package. âThat will be the story over the next 3 to 5 years in the U.S. dairy market. Adapted from www.milkbusiness.com (October 2018)

Answer the following questions: Identify the type of restriction represented by the milk subsidy in the U.S. Use the Extract to provide a justification for your choice. (5 marks)

To settle the trade dispute in NAFTA both the U.S. and Canada agree to remove the subsidy on milk. Discuss the impact of this on the U.S. milk market. Identify the pros and cons aswell as provide advice to the government.(15 marks)

ochrelouse848

Corn is a very valuable product for which the U.S. government routinely offers subsidies. With no price support, the equilibrium price for corn is $300 per ton and the equilibrium quantity is 500 million tons per year. Suppose that the government agrees to pay farmers $350 for every ton of corn they produce and can't sell in the market. According to the farmer's market supply curve, 600 million tons per year is supplied at the price of $350 a ton, so production should increase to this amount. However, domestic users of corn cut back their purchases. Only 450 million tons a year is demanded at the price of $350 a ton, and purchases decrease to this amount. Farmers continue to produce 500 million tons of corn per year, so because they produce a greater quantity of corn than domestic buyers are willing to purchase, something must be done with the surplus. To make the price support work, the government decides to buy the surplus. Step 2 Use the scenario to answer the following questions. In a one-page (250-word) document, answer the following questions using the information provided in the scenario from Step 1: * In this example, how many million tons does the government agree to buy? At what price? * How much in total does the U.S. government provide in subsidy to the corn farmers? Why? * Is the price support in this example efficient or inefficient? Explain your reasoning. * Is the subsidy fair? Explain your reasoning.

aquamarinecoyote26

Step 1: Read the following scenario. Corn is a very valuable product for which the U.S. government routinely offers subsidies. With no price support, the equilibrium price for corn is $300 per ton and the equilibrium quantity is 500 million tons per year. Suppose that the government agrees to pay farmers $350 for every ton of corn they produce and can't sell in the market. According to the farmer's market supply curve, 600 million tons per year is supplied at the price of $350 a ton, so production should increase to this amount. However, domestic users of corn cut back their purchases. Only 450 million tons a year is demanded at the price of $350 a ton, and purchases decrease to this amount. Farmers continue to produce 500 million tons of corn per year, so because they produce a greater quantity of corn than domestic buyers are willing to purchase, something must be done with the surplus. To make the price support work, the government decides to buy the surplus.

Step 2: Use the scenario to answer the following questions.

In a one-page (250-word) document, answer the following questions using the information provided in the scenario from Step 1:

In this example, how many million tons does the government agree to buy? At what price?

How much in total does the U.S. government provide in subsidy to the corn farmers? Why?

Is the price support in this example efficient or inefficient? Explain your reasoning.

Is the subsidy fair? Explain your reasoning.

coppercoyote908

ECON101 Chapter Notes - Chapter 6: Production Quota, Marginal Cost, Deadweight Loss

ECON101 Full Course Notes

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