Question

Rapel Valley in Chile is renowned for its ability to produce high-quality wine at a fraction of the cost of many other vineyards around the world. Rapel Valley produces over $\mathbf{20}$million bottles of wine annually, of which$\mathbf{5}$ million are exported to the United States. Each bottle entering the United States is subjected to a$\mathbf{\backslash (}\mathbf{0}\mathbf{.}\mathbf{50}$ per bottle excise tax, which generates about$\mathbf{\backslash )}\mathbf{2}\mathbf{.}\mathbf{5}$ million in tax revenues. Strong La Niña weather patterns have caused unusually cold temperatures, devastating many of the wine producers in that region of Chile. How will La Niña affect the price of Chilean wine? Assuming La Niña does not impact the California wineproducing region, how will La Niña impact the market for Californian wines?

Short answer

The supply of wine in California will not be affected by the La Nina season; it will remain unchanged. On the other hand, Chilean consumers will expect a low wine price. The cost of wine in California will climb until it reaches the same level as the cost of wine in Chile.

Step-by-step solution

Step 1:Demand and supply imbalance

External factors sometimes shake the demand and supply of merchandise. When merchandise is imported from another country, and that country’s production gets affected by some factors, the importing country may face a demand or supply crisis of that merchandise.

Impact on the Californian wine market

Because of La Nina, wine growers may be unable to produce, resulting in a decrease in the availability of wine in the market. As the supply of wine in Chile decreases, the price of wine will inevitably rise. The following graph better explains the situation. In the graph, the new price is P’, and the new equilibrium state is E’ with less supply S’. In this condition, the quantity supplied will also be lower than the earlier Q’.

According to the graph, the quantity demanded for wine remains constant after the supply of wine decreases. The supply of wine in California will also not be affected by the La Nina season; it will remain unchanged. Thus, Point E will be maintained in the entire process.

Chilean consumers, on the other hand, will expect a low wine price. The cost of wine in California will climb until it reaches the same level as the cost of wine in Chile.