Chapter 9: Privatization (page 327)
Explain the four policies related to Privatisation.
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A particular metal is traded in a highly competitive world market at a world price of \(9 per ounce.
Unlimited quantities are available for import into the United States at this price. The supply of this metal from domestic U.S. mines and mills can be represented by the equation QS = 2/3P, where QS is U.S. output in million ounces and P is the domestic price.
The demand for the metal in the United States is QD = 40 - 2P, where QD is the domestic demand in million ounces.
In recent years the U.S. industry has been protected by a tariff of \)9 per ounce. Under pressure from other foreign governments, the United States plans to reduce this tariff to zero. Threatened by this change, the U.S. industry is seeking a voluntary restraint agreement that would limit imports into the United States to 8 million ounces per year.
a. Under the $9 tariff, what was the U.S. domestic price of the metal?
b. If the United States eliminates the tariff and the voluntary restraint agreement is approved, what will be the U.S. domestic price of the metal?
Japanese rice producers have extremely high production costs, due in part to the high opportunity cost of land and to their inability to take advantage of economies of large-scale production. Analyze two policies intended to maintain Japanese rice production:
(1) a per-pound subsidy to farmers for each pound of rice produced, or
(2) a per-pound tariff on imported rice.
Illustrate with supply-and-demand diagrams the equilibrium price and quantity, domestic rice production, government revenue or deficit, and deadweight loss from each policy. Which policy is the Japanese government likely to prefer? Which policy is Japanese farmers likely to prefer?
In Exercise 4 in Chapter 2 (page 84), we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of \(9 per pound. U.S. domestic supply and demand for various price levels are shown in the following table.
Price | U.S. Supply (Million Pounds) | U.S. Demand (Million Pounds) |
3 | 2 | 34 |
6 | 4 | 28 |
9 | 6 | 22 |
12 | 8 | 16 |
15 | 10 | 10 |
18 | 12 | 4 |
Answer the following questions about the U.S. market:
a. Confirm that the demand curve is given by QD = 40 - 2P, and that the supply curve is given by QS = 2/3P.
b. Confirm that if there were no restrictions on trade, the United States would import 16 million pounds.
c. If the United States imposes a tariff of \)3 per pound, what will be the U.S. price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss?
d. If the United States has no tariff but imposes an import quota of 8 million pounds, what will be the U.S. domestic price? What is the cost of this quota for U.S. consumers of fiber? What is the gain for U.S. producers?
Why have recent successive UK governments prefferred a PFI over PPPs?
In 1983, the Reagan administration introduced a new agricultural program called the Payment-in-Kind Program. To see how the program worked, let’s consider the wheat market:
Suppose the demand function is QD = 28 - 2P and the supply function is QS = 4 + 4P, where P is the price of wheat in dollars per bushel, and Q is the quantity in billions of bushels. Find the free-market equilibrium price and quantity.
Now suppose the government wants to lower the supply of wheat by 25 percent from the free-market equilibrium by paying farmers to withdraw land from production. However, the payment is made in wheat rather than in dollars— hence the name of the program. The wheat comes from vast government reserves accumulated from previous price support programs. The amount of wheat paid is equal to the amount that could have been harvested on the land withdrawn from production. Farmers are free to sell this wheat on the market. How much is now produced by farmers?How much is indirectly supplied to the market by the government? What is the new market price? How much do farmers gain? Do consumers gain or lose?
Had the government not given the wheat back to the farmers, it would have stored or destroyed it. Do taxpayers gain from the program? What potential problems does the program create?
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