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The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy

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Microeconomics ­ECO402
VU
­
Lesson 29
The Sugar Quota
The world price of sugar has been as low as 4 cents per pound, while in the U.S. the price
has been 20-25 cents per pound.
The Impact of a Restricted Market (1997)
­ U.S. production = 15.6 billion pounds
­ U.S. consumption = 21.1 billion pounds
­ U.S. price = 22 cents/pound
­ World price = 11 cents/pound
Sugar Quota in 1997
DUS
SUS
Price
PUS = 21.9
(cents/lb.)
D
The cost of the quotas
20
to consumers was
A
A + B + C + D, or $2.4b.
The gain to producers
16
was area A, or $1b.
C
B
PW = 11
11
8
4
Qd = 24.2
30
0
5
10
15
20
25
Quantity
(billions of pounds)
QS = 4.0
Q'S = 15.6
Q'd = 21.1
DUS
SUS
Price
PUS = 21.9
(cents/lb.)
D
Rectangle D was the
20
gain to foreign producers
A
who obtained quota
allotments, or $600 million.
16
Triangles B and C represent
C
B
the deadweight loss of
$800 million.
PW = 11
11
8
4
Qd = 24.2
0
5
30
10
15
20
25
Quantity
(billions of pounds)
QS = 4.0
Q'S = 15.6
Q'd = 21.1
138
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Microeconomics ­ECO402
VU
The Impact of a Tax or Subsidy
The burden of a tax (or the benefit of a subsidy) falls partly on the consumer and partly on
the producer.
We will consider a specific tax which is a tax of a certain amount of money per unit sold.
Incidence of a Specific Tax
Pb is the price (including
the tax) paid by buyers.
Price
PS is the price sellers receive,
net of the tax. The burden
of the tax is split evenly.
S
Pb
Buyers lose A + B, and
A
sellers lose D + C, and
B
the government earns A + D
P0
in revenue. The deadweight
D
C
t
loss is B + C.
PS
D
Q1
Q0
Quantity
Four conditions that must be satisfied after the tax is in place:
1. Quantity sold and Pb must be on the demand line: QD = QD(Pb)
2. Quantity sold and PS must be on the supply line: QS = QS(PS)
3. QD = QS
4. Pb - PS = tax
Impact of Tax Depends on Elasticities of Supply & Demand
Burden on Buyer
Burden on Seller
D
S
Price
Price
P
S
t
P
P
P
P
t
D
P
Q1 Q0
Q1 Q0
Quantity
Quantity
139
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Microeconomics ­ECO402
VU
The Impact of a Tax or Subsidy
Pass-through fraction
­ ES/(ES - Ed)
­ For example, when demand is perfectly inelastic (Ed = 0), the pass-through fraction is 1,
and all the tax is borne by the consumer.
A subsidy can be analyzed in much the same way as a tax.
It can be treated as a negative tax.
The seller's price exceeds the buyer's price.
Subsidy
S
Price
Like a tax, the benefit
PS
of a subsidy is split
between buyers and
s
P0
sellers, depending
upon the elasticities of
Pb
supply and demand.
D
Q0
Q1
Quantity
With a subsidy (s), the selling price Pb is below the subsidized price PS so that:
­ s = PS - Pb
The benefit of the subsidy depends upon Ed /ES.
­ If the ratio is small, most of the benefit accrues to the consumer.
­ If the ratio is large, the producer benefits most.
Impact of a $0.50 Gasoline Tax
D
S
Price
($ per
gallon)1.50
Lost
Consumer
The annual revenue
Pb = 1.22
from the tax is .50(89)
A
or $44.5 billion. The buyer
pays 22 cents of the tax, and
P0 = 1.00
the producer pays 28 cents.
D t = 0.50
Lost Producer
PS = .72
Surplus
.50
1
Quantity (billion
0
50 60
89 100
150
gallons per year)
140
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Microeconomics ­ECO402
VU
D
S
Price
($ per 1.50
gallon)
Lost
Consumer
Pb = 1.22
A
P0 = 1.00
Deadweight loss = $2.75 billion/yr
D t = 0.50
Lost
PS = .72
Producer
.50
1
Quantity (billion
0
50 60
89 100
150
gallons per year)
141
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor