Question 2

Consider an economy where many farmers plant and sell sugar cane for a living.

(a) Discuss the welfare effects when the government implements a price floor in the sugar cane market to help the sugar cane farmers. Support your answers with a suitable sugar cane market diagram. Are the sugar cane farmers better off with this policy? Explain.

(10 marks)

(b) How would your answer be different if the government commits to buy up all the sugar cane at the floor price from the farmers and sell to the consumers at a lower price to clear the stock? Discuss and support your answers with a suitable sugar cane market diagram.

(15 marks)