University of California, Davis Department of Agricultural and Resource Economics ARE 120 Julian Alston Spring 2016 SECOND MIDTERM EXAMINATION May 19, 2016 Name:_________________________________________ Student Identification Number:__________________________ Section Points I 60 II 60 III 70 IV 60 Total 250 Score THE TOTAL POINTS FOR THIS EXAM ARE 250 ABOUT 3 POINTS PER MINUTE. 1 I. Multiple Choice Section (60 points). For each question circle the letter for only one answer. If you think more than one answer might be correct, choose the best one. Each correct answer is worth 6 points. 1. Wheat policies in the European Union a. b. c. d. e. 2. For a small-country importer, which produces a quantity Q0 domestically under free trade, the most efficient way to support domestic producers is a. b. c. d. 3. a production quota, Q0 a production quota, Q0, combined with an import embargo a production quota, Q0, combined with an import tariff a production quota, Q0, combined with an output subsidy The following activities of marketing orders might generate net social benefits a. b. c. d. e. 4. caused the European Union to become a net exporter were one of the reasons behind the U.S. wheat export subsidies added to the budget cost of U.S. wheat policies all of the above none of the above supply management programs minimum size regulations minimum sugar content regulations all of the above none of the above Assume Canada's wine imports from California are subject to a tariff. Relative to free trade, this policy causes a. a higher U.S. producer price of wine b. a higher U.S. consumer price of wine c. benefits to U.S. taxpayers in the form of tariff revenue d. all of the above e. none of the above 5. Prior to 2004, U.S. tobacco policy benefited U.S. tobacco quota owners at the expense of a. b. c. d. e. U.S. taxpayers foreign tobacco growers U.S. tobacco growers who did not own quota the U.S. economy as a whole none of the above 2 Multiple Choice Section (continued). 6. In the U.S. sugar market, consumers have adjusted to the U.S. sugar policy by a. b. c. a. b. 7. Marketing orders in California a. b. c. d. e. f. 8. were introduced in the 1930s provide generic advertising and promotion are instituted by producer referendum provide mandatory programs for quality control all of the above are true none of the above is true The California dairy policy a. b. c. e. 9. consuming less caloric sweeteners substituting other caloric sweeteners for sugar reducing their consumption of candy all of the above none of the above benefits producers at the expense of taxpayers uses an output quota to control production all of the above none of the above During the period 1985-1995 a. EU consumers and producers both benefited from EU wheat policy b. U.S. sugar policy lowered both world price and U.S. domestic price c. U.S. tobacco quota owners benefited from U.S. tobacco policy at the expense of U.S. consumers and taxpayers d. EU producers benefited from EU wheat policy at the expense of EU consumers, taxpayers and foreign producers e. none of the above is true 10. An import tariff, t per unit, applied by a small-country importer, has the same effects as a. b. c. d. e. an output subsidy of t per unit an export subsidy of t per unit an output subsidy of t per unit and a consumption subsidy of t per unit an output subsidy of t per unit and a consumption tax of t per unit none of the above 3 II. True/False (60 points). For each question circle True or False (DO NOT EXPLAIN). Each question is worth 6 points. T F 1. The U.S. wheat policy evolved partly in response to the EU wheat policy T F 2. The U.S. tobacco program in the 1950s and early 1960s caused increases in U.S. tobacco quality over time T F 3. Supply response to the price incentives under the Common Agricultural Policy caused the EU to become the world's largest importer of wheat in the 1980s T F 4. Minimum size grades for apples can be used to correct make failures. T F 5. The 2004 U.S. tobacco program buyout overcompensated tobacco quota owners T F 6. California uses a milk quota, which limits the production response to its policy of price discrimination and pooling. T F 7. U.S. sugar policy benefits U.S. sugar producers at the expense of U.S. sugar consumers and U.S. corn growers. T F 8. Marketing orders undertake activities that usually involve benefits to producers but may be at the expense of the economy as a whole. T F 9. Regulated minimum sugar standards for grapes are more likely to yield net social benefits if supermarkets allow customers to taste grapes before they buy. T F 10. An import tariff and an import quota on sugar given to food processors may be equivalent from the point of view of U.S. sugar consumers but will be very different from the point of view of U.S. sugar producers 4 III. (70 points) U.S. Sugar Policies The U.S. sugar market is illustrated in figure 1, distributed with this exam. S is the U.S. supply (and marginal cost) curve, DD is the U.S. demand curve for sugar, DI is the U.S. demand for imported sugar (given by the horizontal difference between U.S. supply and demand), and SI is the supply of sugar to the United States from the rest of the world (ROW). Use the labels on the price axis, the quantity axis, and the welfare areas to answer the following questions. 1. (10 points) Assume no U.S. sugar policy. Complete row 1 of table 1 to show the levels of (a) quantity produced, (b) the price received by producers, (c) U.S. consumption, (d) the price paid by U.S. consumers, (e) U.S. producer surplus, (f) U.S. consumer surplus, and (g) total U.S. economic surplus. 2. (20 points) Assume an import quota, I1 is introduced and given to U.S. middlemen. Complete row 2 of table 1, to show the magnitude and direction of the effect of the introduction of the import quota on changes in (a) quantity produced, (b) the price received by U.S. producers, (c) U.S. consumption, (d) the price paid by U.S. consumers, (e) U.S. producer surplus, (f) U.S. consumer surplus, (g) U.S. middlemen surplus, and (h) total U.S. national economic surplus. 5 III. (continued) 3. (40 points) a. What are the effects of the import quota policy (in table 1) on total U.S. welfare? Can we say for sure whether the United States gains or loses? b. Suppose the quota is given to foreigners who supply imports to the United States. Compare the effects on total U.S. welfare from this policy and the import quota owned by U.S. middlemen. c. Suppose, instead of a quota, a tariff on imports is used to support the price at the same level. What is the per unit tariff rate (in terms of the labels on figure 1) and what are the different welfare effects compared with the import quota owned by U.S. middlemen. d. Which of the policies in parts a., b., and c. is closest to the actual U.S. sugar policy? 6 Section IV. A Small Rice Exporter (60 points) 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? 7 Table 1: Effects of an Import Quota on Sugar U.S. Quantity Produced 1. No Policy (levels of variables in this row) 2. Effects of Introducing an Import Quota (I1), Given to U.S. Middlemen (changes in this row) U.S. Producer Price U.S. Quantity Consumed U.S. Consumer Price U.S. Producer Surplus U.S. Consumer Surplus U.S. Middlemen Surplus Not applicable U.S. National Surplus 8 Table 2: Effects of Price Policies in Small Rice-Exporting Economy Domestic Quantity Produced Domestic Producer Price (net of quota rent) Domestic Quantity Consumed Domestic Consumer Price Domestic Producer Surplus (incl. quota rent) Effects of Introducing PolicyChanges Relative to No Policy 1. Domestic Rice Quota (Q1) 2. Domestic Price (PD) with Price Pooling 3. Minimum Price (PP) with Deficiency Payments Domestic Consumer Surplus Domestic Taxpayer Surplus National Surplus 9 Figure 1. Effects of U.S. Sugar Policies U.S. Market International Market Price Price S a b P3 c d P2 g h P1 i e u f k j n 0 Q1 p Q2 Q3 q r v w l m o SI t DI y DD s x z Q4 Q5 Q6 U.S. Quantity 0 I1 I2 Traded Quantity 10 11 Figure 2: Effects of Price Policies for a Small Rice Exporter Price (P) a PD S0 b c d PP f e h g PW j i D0 ARPOOL k m n u x o q r z 0 s w Q1 Q2 Q3 Q4 Q5 Quantity (Q)