Suppose that farmers in Small Village use their land to cultivate either traditional green beans, for which transfer costs to external market are moderate, or supermarket carrots, for which transfer costs to external market are initially very high, and they fully cultivate all available land. The external market price for a kilogram of supermarket carrots is higher than the external market price for a kilogram of traditional green beans.

a. Draw two diagrams depicting the Small Village markets for green beans and supermarket carrots, with the market for green beans in autarky equilibrium and the local market for carrots in an equilibrium in which local farmers supply no supermarket carrots and local consumers demand no carrots.

b. Suppose that joint investments by supermarkets and NGOs reduce the transfer costs associated with exporting supermarket carrots to the external market (while leaving transfer costs on exports of traditional green beans unchanged). Depict in the diagram a reduction in transfer costs large enough to induce farmers in Small Village to begin producing and exporting supermarket carrots. What happens to the price (net of transfer costs) that farmers could expect to bring home from producing and exporting supermarket carrots?

c. What might happen to the local supply schedule for traditional beans in response to this change in the local market for supermarket carrots? Explain.

Reference:

Development Economics: Theory, Empirical Research, and Policy Analysis. (n.d.). library.lol. Retrieved March 29, 2022, from http://library.lol/main/D9C80D693CF037C7E51889B24D1179D1

Chapter 8