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The Economics of Food Markets Price/Quantity Allocation and Welfare Effects of Export Tax. Eg. Thailand’s Rice Market Tutorial: 27th November 2007 Export Taxes and Thailand • Large producer with surpluses of rice • Unlike many countries who must import a lot of their consumption needs, Thailand generates foreign exchange by exporting rice. • But dependence on rice has posed problems due to unstable world prices: – Rice represents large portion of national income – It’s the staple food for consumption • Government has tried to protect economy from price fluctuations by imposing tax on exports. (i) Effects of Export Tax on Thai Rice: Elastic Supply Price Price Ptw Export Supply D Qd Pw Ptd A C E F B International Demand Dd Qd Qt d Qt s Qs Quantity e’ e Exports Elastic Supply of Thai Rice • Before export tax: world price = domestic price = Pw • Producers supply Qs & Consumers demand Qd • After export tax: Domestic supply falls (Qs to Qts) because producers bear part of tax, receiving a lower price, Ptd. • Producer surplus falls by A+B+C • Consumers benefit from increased consumption (Qd to Qtd) and increased consumer surplus of A+B • Conclusion: Domestic producers lose and domestic consumers gain. Elastic Supply of Thai Rice • A large part of the cost of the tax is borne by foreign customers who pay higher price • Producers effectively pay part of tax also by receiving lower domestic price, Ptd. • Total government revenue = E + F • Decline in economic efficiency represented by deadweight loss triangles B+D. (ii) Effects of Export Tax on Thai Rice: Inelastic Supply Price Price Sd Ptw Export Supply D Pw A E C F Ptd B International Demand Dd Qd Qt d Qs Qt s Quantity e’ e Exports Elastic Supply vs Inelastic Supply • Thailand is a large global producer of rice -> domestic supply affects export supply • When supply is more inelastic, the size of deadweight loss D, is less. • Why? • Because domestic producers are less inclined to reduce supply. • Conclusion?