applied welfare economics and agricultural policy€¦ · 1. approach: economic activities welfare...

Applied Welfare Economicsand Agricultural Policy

by Dieter Kirschke

in cooperation with Franz Heidhues and Jerzy Wilkin

supported by Nana Künkel

MSc Course, Humboldt-Universität zu Berlin

Ch1: 2/42

Applied Welfare Economics and Agricultural Policy

Introduction

1 Principles of applied welfare economics2 Price policy I3 Price policy II

4 EU agricultural policy and international framework

Ch1: 3/42

5 Agricultural policy in transition countries (Wilkin) 6 EU enlargement and accession (Wilkin)7 Rural finance in development (Heidhues)8 Structural adjustment policies (Heidhues)

9 Structural policy10 Multiobjective policy analysis

Chapter 1

Principles of Applied Welfare Economics

MSc Course, Humboldt-Universität zu Berlin

Ch1: 5/42

Benefit

Benefit:

The benefit from consumption of a good is equal to the willingness to pay for this good.

Demand curvep

q Quantity

Assumptions:

people count, consumer sovereignty, irrelevance of distribution

What is Benefit in Applied Welfare Economics?

Ch1: 6/42

The cost to produce a certain amount of a good is equal to the foregone consumption of other goods measured as foregone willingness to pay.

PriceSupply curve

q Quantity

What is Welfare Cost?

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BenefitPriceS

q Quantity

Welfare Measurement under Autarky: 1. Approach: economic activities

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PriceS

q Quantity

Ch1: 9/42

Welfare

Welfare:

Welfare describes the level of satisfaction that people obtain from the consumption of a good.

PriceS

q Quantity

Note:Welfare (W) = Benefit (B) - Cost (C)

Ch1: 10/42

Expenditure

BenefitPrice

Demand curvep

q Quantity

What is Consumer Surplus?

Ch1: 11/42

Consumer surplusPrice

Demand curvep

q QuantityConsumer surplus:

The consumer surplus describes the satisfaction for a group of consumers to consume a certain amount of a good. It is equal to the willingness to pay for this amount of the good (benefit), minus foregone willingness to pay on other markets.

Note: Consumer surplus = Benefit - Expenditure

What is Consumer Surplus?

Ch1: 12/42

Revenue

Supply curve

q Quantity

What is Producer Surplus?

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Producer surplus:

The producer surplus describes the satisfaction for a group of producers to produce a certain amount of a good. It is equal to the potential willingness to pay for the production of a certain amount of this good (revenue), minus foregone willingness to pay (cost). The producer surplus has the gross margin as its equivalent on firm level.

Producer surplus

Note: Producer surplus = Revenue - Cost

Supply curve

q Quantity

What is Producer Surplus?

Ch1: 14/42

Consumer surplus

PriceS

q Quantity

Welfare Measurement under Autarky: 2. Approach: economic groups

Ch1: 15/42

Producer surplus

PriceS

q Quantity

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Welfare

Welfare:

Welfare describes the level of satisfaction that people obtain from the consumption of a good.

PriceS

q Quantity

Note:Welfare (W) = Consumer surplus (CS) + Producer surplus (PS)

Ch1: 17/42

1. Approach: economic activitiesWelfare (W) = Benefit (B) - Cost (C)

WelfarePriceS

q Quantity

2. Approach: economic groupsWelfare (W) = Consumer surplus (CS) + Producer surplus (PS)

Welfare Measurement under Autarky: Summary

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BenefitPrice S

qd Quantity

Welfare Measurement with Trade

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Price S

qd Quantity

Ch1: 20/42

Foreign exchange

Foreign exchange:

Foreign exchange describes the potential satisfaction that an economy can achieve from the consumption of goods produced in other countries. Foreign exchange results from the potential willingness to pay from export goods (foreign exchange earning), minus foregonewillingness to pay for import goods.

Price S

qd Quantity

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Welfare

Note:Welfare (W) = Benefit (B) - Cost (C) + Foreign exchange (FE)

Price S

qd Quantity

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Welfare Measurement with Government Intervention

Consumer surplusPrice S

q Quantity

Ch1: 23/42

Producer surplusPrice S

q Quantity

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Tax = Governmentbudget

Government budget:Government budget describes the potential satisfaction that an economy can achieve from this source. It is equal to the potential willingness to pay (government revenue), minus the foregone willingness to pay (government expense).

Price S

q Quantity

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Welfare

Note:Welfare (W) = Consumer surplus (CS) + Producer surplus (PS)

+ Government budget (B)

Price S

q Quantity

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Price S

qs Quantity

i denotes a situation under current price policy toincrease foreign exchange earning

w denotes a free trade situation

qs‘ qd

Welfare Effects of Import Substitution

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Decrease in benefit

Price S

qs Quantity

qdqs‘ qd

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Increase in cost

Price S

qs Quantity

qdqs‘ qd

Ch1: 29/42

Increase inforeign exchange

Price S

qs Quantity

qdqs‘ qd

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Decrease inwelfare

Price S

qs Quantity

qdqs‘ qd

dWelfare (dW) = dBenefit (dB) - dCost (dC) +dForeign exchange (dFE)

(-) (+) (+) (+)

Ch1: 31/42

Does Government Revenue Increase Welfare?

i denotes a situation under current price policy toincrease government revenue

w denotes a free trade situation

qs‘qd

Price S

qs Quantity

Export country

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Increase inconsumer surplus

qs‘qd

Price S

qs Quantity

Export country

Ch1: 33/42

Decrease inproducer surplus

qs‘qd

Price S

qs Quantity

Export country

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Increase ingovernment budget

qs‘qd

Price S

qs Quantity

Export country

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Decrease inwelfare

qs‘qd

Price S

qs Quantity

dW = dPS + dCS + G(-) (-)

(-) (+)

Export country

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Decrease inproducersurplus (PS)

Loss ofwelfare (W)

Increase inconsumersurplus (CS)

Increase ingovernment expense (G)

pi = pw

Welfare Effects of Producer Incentive Prices and Cheap Food Prices for Consumers

Import subsidy

qs‘ qd‘

qs‘ qd‘ qs‘ qd‘

qs‘ qd‘

Ch1: 37/42

Producersurplus (PS) is constant!

Increase inconsumer surplus (CS)

Loss ofwelfare (W)

pid‘

pis=pi

pid‘

pis=pi

pid‘

pis=pi

pid‘

pis=pi

Consumption subsidy

qd‘ qd‘

Ch1: 38/42

Loss ofwelfare (W)

Increase inproducer surplus (PS)

pid‘

pis=pi

pis‘

pid‘

pis=pi

pis‘

pid‘

pis=pi

pis‘

pid‘

pis=pi

pis‘

Consumption and production subsidy

qs‘ qd‘ qs‘ qd‘

Ch1: 39/42

Loss ofwelfare (W)

Increase inproducer surplus (PS)

pid‘

pis=pi

pis‘

pid‘

pis=pi

pis‘

pid‘

pis=pi

pis‘

pid‘

pis=pi

pis‘

“Social food policy”

qd‘=qs‘

qd‘=qs‘ qd‘=qs‘

qd‘=qs‘

Ch1: 40/42

Discussion

• Should everything be counted in money?

• Do Markets impose a „dollar democracy“?

Ch1: 41/42

Literature

Houck, J.P. (1986): Elements of Agricultural Trade Policies. New York: Macmillan, pp. 45-60, 87-93

Pindyck, R.S.; Rubinfeld, D.L. (1998): Microeconomics. 4th. ed. Upper Saddle River: Prentice-Hall, pp. 289-329

Buckwell, A. (1997): Some Microeconomic Analysis of CAP Market Regimes. In: Ritson, C.; Harvey, D.R. (Ed.): The Common Agricultural Policy.Wallingford: CAB International, pp.139-162

Helmberger, P.G.; Chavas, J.-P. (1996): The Economics of Agricultural Prices. New Jersey: Prentice-Hall, pp. 203-221

Just, R.E.; Hueth, D.L.; Schmitz, A. (2004): The Welfare Economics of Public Policy. Northampton, MA: Edward Elgar, pp. 49-182

Sadoulet, E.; de Janvry, A. (1995): Quantitative Development Policy Analysis. Baltimore: The Johns Hopkins University Press, pp. 176-213

Ch1: 42/42

Questions

1. How can welfare be measured with supply and demand curves?

2. Explain the two different approaches to welfare measurement based on economic activities and economic groups!

3. What are the economic consequences of policies to increase foreign exchange earning? Give an example!

4. What are the economic consequences of policies to increase government revenue? Give an example!

5. Explain the budgetary consequences of various policies to provide producers with incentive prices and consumers with cheap food prices!

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