In exercises 18.9 and 18.10, we investigated policies that imposed a price floor in the corn market.
A. We will now see whether some of the price regulation proposals we considered are equivalent to taxes or subsidies. For simplicity, assume that tastes are quasilinear in corn.
(a) In exercise 18.9, we began by considering a price floor without any additional government program. Illustrate the equilibrium impact of such a price floor on the price of corn paid by consumers as well as the price of corn received by producers.
(b) If you were to design a tax or subsidy policy that has the same impact as the stand-alone price floor, what would it be?
(c) In exercise 18.10, we considered the combination of a price floor and a government purchasing program under which the government guaranteed it would purchase any surplus corn at the price floor and then sell it at a price sufficiently low for all of it to be bought. Illustrate the impact of this program—including the deadweight loss.
(d) If you were to design a tax or subsidy policy with the aim of achieving the same outcome for the marginal consumer and producer as the policy in (c), what would you propose?
(e) Would your proposal result in the same level of consumer and producer surplus? Would it result in the same deadweight loss?
B. Suppose, as in exercises 18.9 and 18.10, that the domestic demand curve for bushels of corn is given by p = 24−0.00000000225x while the domestic supply curve is given by p = 1+0.00000000025x.
(a) Suppose the government imposes a price ceiling of p̅ = 3.5 (as in exercise 18.9). In the absence of any other program, how much will consumers pay (per bushel) and how much will sellers keep (per bushel) after accounting for the additional marginal costs incurred by producers to compete for consumers?
(b) If you wanted to replicate this same outcome using taxes or subsidies, what policy would you propose?
(c) Suppose next that the government supplemented its price floor from (a) with a government purchasing program that buys all surplus corn—and then sells it at the highest possible price at which all surplus corn is bought. What is that price?
(d) If you were to design a tax or subsidy policy that has the same impact on the marginal consumer and producer, what would it be?