Question

Because export taxes on are frequently seen as falling on foreign consumers, they tend to be favored as revenue sources by many countries. What assumptions are necessary for export taxes to be born entirely by foreign consumers? How likely is it that this set of assumptions characterizes the current world market for food commodities such as coffee or oranges?

Short answer

Short Answer: The likelihood of export taxes being entirely borne by foreign consumers in the current world market for food commodities such as coffee or oranges is low. This is because the necessary assumptions, such as perfectly inelastic demand, no substitution effect, exporting country's monopoly power, and foreign consumers having no bargaining power, do not generally hold true for these products in today's market.

Step-by-step solution

Assumptions for Export Taxes to be Borne by Foreign Consumers

There are some key assumptions to consider for export taxes to be completely borne by foreign consumers: 1. Perfectly inelastic demand: In this case, foreign consumers are not sensitive to price changes; thus, any change in the price of the product due to export taxes would still result in the same quantity demanded. 2. No substitution effect: There should be no readily available substitute goods in the foreign market. If there are substitute goods available, consumers will switch to those substitutes when prices go up, leading to decreased demand for the taxed product, and the exporting country would bear some of the tax burden. 3. Monopoly power of the exporting country: The exporting country should have a significant market power, either as a monopoly or as a dominant player in the market. This would mean that the exporting country has the ability to set prices without losing significant market share to competitors. 4. Foreign consumers have no bargaining power: The consumers in the foreign market should have little to no ability to negotiate the prices, which means that they have to accept the prices set by the exporting country.

Likelihood of Assumptions Characterizing the Current World Market for Food Commodities

Let's now analyze the likelihood of these assumptions being applicable to the current world market for food commodities such as coffee or oranges: 1. Perfectly inelastic demand: In the case of food commodities like coffee and oranges, the demand is not likely to be perfectly inelastic. Though consumers may have a preference for these goods, it is highly unlikely that they are entirely insensitive to changes in their prices. 2. No substitution effect: For coffee and oranges, there might be substitute goods available. For example, consumers may switch from oranges to other fruits like apples or grapes. However, for some niche products, this assumption might still hold true to some extent. 3. Monopoly power of the exporting country: While some countries have a significant share in the production and export of certain food commodities, it is unlikely that any single country has a monopoly or dominant market power for coffee and oranges. Consequently, the market is usually more competitive, and the ability of a single country to set prices is limited. 4. Foreign consumers have no bargaining power: In the current globalized world, consumers, particularly importers, have multiple supplier options. They can leverage their bargaining power to negotiate better prices and find alternatives when needed.

Conclusion

Based on the analysis, it is unlikely that the necessary assumptions for export taxes to be borne entirely by foreign consumers hold true for food commodities such as coffee or oranges in the current world market. The demand for these products is not perfectly inelastic, substitutes are available, monopoly power is limited, and foreign consumers have some bargaining power. Therefore, export taxes may not be completely borne by foreign consumers and could also affect exporting countries.

Key concepts

Inelastic Demand

When discussing export taxes and their impact on consumers, the concept of inelastic demand plays a crucial role. It refers to a situation where the quantity demanded by consumers remains relatively unchanged regardless of price fluctuations. If the demand for a product such as coffee or oranges is perfectly inelastic, consumers would continue to purchase the same amount even if the price increased due to an export tax.
For a product to have perfectly inelastic demand, it must be considered essential or without close substitutes, like certain medications. However, with food commodities such as coffee or oranges, while consumers may have a strong preference, they are not completely insensitive to price changes. Alternative beverages and fruits can often serve as substitutes if prices rise too high, hinting that demand is not perfectly inelastic. This has implications for export taxes, as it suggests that if a country imposes such taxes, the burden may partly fall on domestic producers instead of foreign consumers.

Substitution Effect

The substitution effect occurs when consumers replace a more expensive item with a less expensive alternative in response to price changes. Within the context of export taxes, if the price of an exported commodity rises due to the tax, foreign consumers may look for similar goods that can fulfill the same need or desire.
For instance, if an export tax is levied on oranges, consumers might switch their consumption to apples or grapes, which are not taxed. This effect would undermine the intention of the export tax, as the shift in consumption reduces the demand for the taxed product. Thus, a key assumption for export taxes to be entirely borne by foreign consumers is the absence of this effect. However, given the diversity in the food market and the availability of a myriad of substitutes for commodities like coffee and oranges, completely negating the substitution effect is highly improbable, leading to a shared tax burden.

Market Monopoly Power

The degree of market monopoly power that an exporting country possesses influences how an export tax will affect global consumers. If a country holds significant monopoly power, it suggests that the country is a primary or sole provider of a commodity and can therefore influence market prices without losing market share.
In the real world, such monopoly power is rare, particularly in the markets for agricultural products like coffee or oranges. Typically, there are several competing producer countries. This competitive environment limits any single country's ability to unilaterally impose an export tax without affecting its own market share, as foreign consumers can potentially source the product from other countries. If a country does happen to exert substantial monopoly power over a commodity, then the export tax may largely be passed on to consumers, which is a rare situation.

Consumer Bargaining Power

Finally, the concept of consumer bargaining power within international markets dictates the extent to which foreign consumers can influence the prices of the goods they purchase. High bargaining power means that buyers have the ability to demand and negotiate for lower prices, while low bargaining power suggests that consumers must accept the prices set by sellers.
In a global market with numerous suppliers, like those of coffee and oranges, buyers often have significant bargaining power. For example, large importers or retail chains can leverage their purchasing volume to negotiate prices. With this power, foreign consumers may resist price increases stemming from export taxes and shift their purchasing to suppliers from countries that do not impose such taxes. As a result, at least part of the export tax can be absorbed by the exporting country's economy, instead of being fully transferred to foreign consumers.