The market for rice in a small, open economy is illustrated in figure 2, provided with this exam.Assume throughout that an embargo is applied against imports of rice, which might otherwise undermine the domestic policies.In figure 2, S0 is the supply (and marginal cost) curve, D0 is the demand curve, and the world market price is PW.Use the labels for prices, quantities, and welfare areas on figure 2 to answer the following questions.

1. (15 points)

Suppose the government introduces a domestic rice marketing quota equal to Q1, with the quota rights given to domestic producers.Complete row 1 of table 2 to show the effects of introducing the quota policy on quantities, prices, and economic welfare areas (include quota rent as an element of producer surplus; show the net producer price, the selling price minus quota rent, in cases where quota rent applies).

2.(15 points)

Alternatively, suppose the government fixes the domestic price for rice at PD per unit, and pays producers a pooled price given by the weighted average of the domestic and export prices.The pooled price line (representing average revenue associated with PD) is shown as ARPOOL in figure 2.Complete row 2 of table 2 to show the effects of introducing the price discrimination and pooling policy on quantities, prices, and economic welfare areas.

3.(15 points)

Alternatively, suppose the government introduces a minimum price for rice equal to PP per unit, supported by deficiency payments.Complete row 3 of table 2 to show the effects of introducing the policy on quantities, prices, and economic welfare areas.

4.(15 points)

a. Comparing the quota and the pooling policy, which has the higher deadweight loss and why?

b. Comparing the pooling policy and the deficiency payments policy, which has the higher deadweight loss and why?

c. Comparing the pooling policy and the deficiency payments policy, which has the higher transfer efficiency (average producer benefits per unit of deadweight loss) and why?

11 Figure 2: Effects of Price Policies for a Small Rice Exporter Price (P) 3 PD 50 P ARPOOL k Do n 0 Q1 Q2 Q3 Q4 Q5 Quantity (Q)Table 2: Effects Of Price Policies in Small RICEEXPDFHHQ' Economy Domestic Domestic Domestic Domestic Domestic Domestic Domestic National Quantity Producer Quantity Consumer Producer Consumer Taxpayer Surplus Produced Price {net of Consumed Price Surplus (incl. Surplus Surplus quota rent) quota rent] Effects of lntmducing PolicyChanges Relative to No Policy 1. Domestic Rice Quota (Ch) 2. Domestic Price (PD) with Price Pooling 3. Minimum Price {Pp} with Deciency Payments