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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
© Dieter Kirschke, HU Berlin
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
© Dieter Kirschke, HU Berlin
Applied Welfare Economics and Agricultural Policy
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
Applied Welfare Economics and Agricultural Policy
MSc Course, Humboldt-Universität zu Berlin
Ch1: 5/42
© Dieter Kirschke, HU Berlin
Benefit
Benefit:
The benefit from consumption of a good is equal to the willingness to pay for this good.
Price
Demand curvep
q Quantity
Assumptions:
people count, consumer sovereignty, irrelevance of distribution
What is Benefit in Applied Welfare Economics?
Ch1: 6/42
© Dieter Kirschke, HU Berlin
Cost
Cost:
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?
Ch1: 7/42
© Dieter Kirschke, HU Berlin
BenefitPriceS
q Quantity
p
D
Welfare Measurement under Autarky: 1. Approach: economic activities
Ch1: 8/42
© Dieter Kirschke, HU Berlin
Cost
PriceS
q Quantity
p
D
Welfare Measurement under Autarky: 1. Approach: economic activities
Ch1: 9/42
© Dieter Kirschke, HU Berlin
Welfare
Welfare:
Welfare describes the level of satisfaction that people obtain from the consumption of a good.
PriceS
q Quantity
p
D
Note:Welfare (W) = Benefit (B) - Cost (C)
Welfare Measurement under Autarky: 1. Approach: economic activities
Ch1: 10/42
© Dieter Kirschke, HU Berlin
Expenditure
BenefitPrice
Demand curvep
q Quantity
What is Consumer Surplus?
Ch1: 11/42
© Dieter Kirschke, HU Berlin
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
© Dieter Kirschke, HU Berlin
Revenue
Cost
Price
Supply curve
q Quantity
p
What is Producer Surplus?
Ch1: 13/42
© Dieter Kirschke, HU Berlin
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
Price
Supply curve
q Quantity
p
What is Producer Surplus?
Ch1: 14/42
© Dieter Kirschke, HU Berlin
Consumer surplus
PriceS
q Quantity
p
D
Welfare Measurement under Autarky: 2. Approach: economic groups
Welfare Measurement under Autarky: 2. Approach: economic groups
Ch1: 15/42
© Dieter Kirschke, HU Berlin
Producer surplus
PriceS
q Quantity
p
D
Welfare Measurement under Autarky: 2. Approach: economic groups
Ch1: 16/42
© Dieter Kirschke, HU Berlin
Welfare
Welfare:
Welfare describes the level of satisfaction that people obtain from the consumption of a good.
PriceS
q Quantity
p
D
Note:Welfare (W) = Consumer surplus (CS) + Producer surplus (PS)
Welfare Measurement under Autarky: 2. Approach: economic groups
Ch1: 17/42
© Dieter Kirschke, HU Berlin
Note:
1. Approach: economic activitiesWelfare (W) = Benefit (B) - Cost (C)
WelfarePriceS
q Quantity
p
D
2. Approach: economic groupsWelfare (W) = Consumer surplus (CS) + Producer surplus (PS)
Welfare Measurement under Autarky: Summary
Ch1: 18/42
© Dieter Kirschke, HU Berlin
BenefitPrice S
qd Quantity
p
D
qs
Welfare Measurement with Trade
Ch1: 19/42
© Dieter Kirschke, HU Berlin
Cost
Price S
qd Quantity
p
D
qs
Welfare Measurement with Trade
Ch1: 20/42
© Dieter Kirschke, HU Berlin
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
p
D
qs
Welfare Measurement with Trade
Ch1: 21/42
© Dieter Kirschke, HU Berlin
Welfare
Note:Welfare (W) = Benefit (B) - Cost (C) + Foreign exchange (FE)
Price S
qd Quantity
p
D
qs
Welfare Measurement with Trade
Ch1: 22/42
© Dieter Kirschke, HU Berlin
Welfare Measurement with Government Intervention
Consumer surplusPrice S
q Quantity
pp
D
pc
Ch1: 23/42
© Dieter Kirschke, HU Berlin
Welfare Measurement with Government Intervention
Producer surplusPrice S
q Quantity
pp
D
pc
Ch1: 24/42
© Dieter Kirschke, HU Berlin
Welfare Measurement with Government Intervention
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
pp
D
pc
Ch1: 25/42
© Dieter Kirschke, HU Berlin
Welfare
Note:Welfare (W) = Consumer surplus (CS) + Producer surplus (PS)
+ Government budget (B)
Price S
q Quantity
pp
D
pc
Welfare Measurement with Government Intervention
Ch1: 26/42
© Dieter Kirschke, HU Berlin
Price S
qs Quantity
pi
D
pw
qd
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
Ch1: 27/42
© Dieter Kirschke, HU Berlin
Decrease in benefit
Price S
qs Quantity
pi
D
pw
qdqs‘ qd
‘
Welfare Effects of Import Substitution
Ch1: 28/42
© Dieter Kirschke, HU Berlin
Welfare Effects of Import Substitution
Increase in cost
Price S
qs Quantity
pi
D
pw
qdqs‘ qd
‘
Ch1: 29/42
© Dieter Kirschke, HU Berlin
Welfare Effects of Import Substitution
Increase inforeign exchange
Price S
qs Quantity
pi
D
pw
qdqs‘ qd
‘
Ch1: 30/42
© Dieter Kirschke, HU Berlin
Welfare Effects of Import Substitution
Decrease inwelfare
Price S
qs Quantity
pi
D
pw
qdqs‘ qd
‘
Note:
dWelfare (dW) = dBenefit (dB) - dCost (dC) +dForeign exchange (dFE)
(-)
(-) (+) (+) (+)
(-)
Ch1: 31/42
© Dieter Kirschke, HU Berlin
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
pw
D
pi
qd‘
Export country
Ch1: 32/42
© Dieter Kirschke, HU Berlin
Does Government Revenue Increase Welfare?
Increase inconsumer surplus
qs‘qd
Price S
qs Quantity
pw
D
pi
qd‘
Export country
Ch1: 33/42
© Dieter Kirschke, HU Berlin
Does Government Revenue Increase Welfare?
Decrease inproducer surplus
qs‘qd
Price S
qs Quantity
pw
D
pi
qd‘
Export country
Ch1: 34/42
© Dieter Kirschke, HU Berlin
Does Government Revenue Increase Welfare?
Increase ingovernment budget
qs‘qd
Price S
qs Quantity
pw
D
pi
qd‘
Export country
Ch1: 35/42
© Dieter Kirschke, HU Berlin
Does Government Revenue Increase Welfare?
Decrease inwelfare
qs‘qd
Price S
qs Quantity
pw
D
pi
qd‘
(+)
Note:
dW = dPS + dCS + G(-) (-)
(-) (+)
Export country
Ch1: 36/42
© Dieter Kirschke, HU Berlin
Decrease inproducersurplus (PS)
Loss ofwelfare (W)
Increase inconsumersurplus (CS)
Increase ingovernment expense (G)
P S
qs Q
pi‘
D
pi = pw
qd
P S
qs Q
pi‘
D
pi = pw
qd
P S
qs Q
pi‘
D
pi = pw
qd
P S
qs Q
pi‘
D
pi = pw
qd
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
© Dieter Kirschke, HU Berlin
Welfare Effects of Producer Incentive Prices and Cheap Food Prices for Consumers
Producersurplus (PS) is constant!
Increase inconsumer surplus (CS)
Increase ingovernment expense (G)
Loss ofwelfare (W)
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
Consumption subsidy
qd‘
qd‘ qd‘
qd‘
Ch1: 38/42
© Dieter Kirschke, HU Berlin
Welfare Effects of Producer Incentive Prices and Cheap Food Prices for Consumers
Loss ofwelfare (W)
Increase inconsumer surplus (CS)
Increase ingovernment expense (G)
Increase inproducer surplus (PS)
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
pis‘
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
pis‘
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
pis‘
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
pis‘
Consumption and production subsidy
qs‘ qd‘ qs‘ qd‘
qs‘ qd‘ qs‘ qd‘
Ch1: 39/42
© Dieter Kirschke, HU Berlin
Welfare Effects of Producer Incentive Prices and Cheap Food Prices for Consumers
Loss ofwelfare (W)
Increase ingovernment expense (G)
Increase inproducer surplus (PS)
Increase inconsumer surplus (CS)
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
pis‘
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
pis‘
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
pis‘
P S
qs Q
pid‘
D
pis=pi
d=pw
qd
pis‘
“Social food policy”
qd‘=qs‘
qd‘=qs‘ qd‘=qs‘
qd‘=qs‘
Ch1: 40/42
© Dieter Kirschke, HU Berlin
Discussion
• Should everything be counted in money?
• Do Markets impose a „dollar democracy“?
Ch1: 41/42
© Dieter Kirschke, HU Berlin
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
© Dieter Kirschke, HU Berlin
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!