Question

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?

Short answer

• The supply-and-demand diagram for the policy of a per-pound subsidy to

farmers:

• The supply-and-demand diagram for the policy of a per-pound tariff on imported rice:

Step-by-step solution

Step 1. The graphical presentation of the policy that provides a per-pound subsidy to farmers.

Suppose the government implements the policy under which the farmers would provide a per-pound subsidy on each pound of rice. In that case, they will increase their production because of increased returns. The domestic supply curve of rice production will shift rightward. The change in the domestic rice production under the subsidy policy is shown in the following graph.

In the above graph, rice production's free market equilibrium point lies at point e with equilibrium price at P and quantity at q. The policy of subsidy has shifted the supply curve to its right, causing a new equilibrium point at e’. The price of the wheat decreased to p’, and quantity has increased to q.’

The graph shows that the subsidy policy will decrease the domestic price of rice and increase the domestically produced quantity of rice in the market. At the same time, the policy is creating deadweight loss (DWL) and government deficit. The colored triangular area is the DWL, and the area encircled by (abcd) is the government deficit in the graph.

Step 2. The graphical presentation of the policy that provides a per-pound tariff on imported rice

The following graph shows the market equilibrium of domestically produced rice and the price of imported rice.

In the above graph, the market is in equilibrium at point ‘e’ with price P and quantity q. The price of the imported rice (world price) of rice is PW which is lower than the price at the domestic market, as shown in the graph. The domestic market consumers will prefer imported rice instead of domestically produced rice because of the lower price. But at the imported price, the quantity demand is greater than the quantity supplied.

If the government implements the policy under which the government put a per-pound tariff on imported rice, the price of the imported rice will go up for the domestic market at P’.The increase in price will encourage domestic producers to increase production, and consumers will decrease consumption. The gap between the quantity demand and quantity supplied will decrease, as shown in the graph.

The policy will create deadweight loss (DWL) equal to the sum of areas A and B, as shown in the graph. The government will earn revenue equal to the rectangular area (abcd).

Step 3. Compare both the policies

• Policy preferred by the government:The policy which the Japanese government would like to prefer is the per-pound tariff policy. The reason behind this is that the government will earn revenue from the imported rice under this policy. The government will use the earned revenue on development work.

• Policy preferred by the farmers: The policy which Japanese farmers prefer is the per-pound subsidy to them for each pound of rice produced. The reason behind this is that the farmers will earn more returns for each pound of rice produced. The subsidy also decreases the domestic price of the rice, which increases the demand for it in the market. The farmers would be able to sell more.