In order to maintain a certain level of domestic production and employment in the U.S. sugar industry, the federal government in 1983 guaranteed U.S. sugar producers a minimum (“market stabilization”) price for their sugar. The price support program involved both a tariff and a quota, as well as federal subsidies. For the purpose of this question, however, we will focus only on the import quota, since it was the major restraint. To simplify the analysis, we will assume that the United States is a “small economy.” The quota licenses involved in the U.S. sugar program were distributed free to foreign suppliers.
Here are the basic data representing (hypothetical) quantities, prices, and slopes of supply and demand curves for the 1983 US sugar industry in the presence of an import quota.
Import quota = 7 billion pounds of sugar per year Domestic production = 12.4 billion pounds of sugar per year Domestic consumption = 19.4 billion pounds of sugar per year.
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Employment in the sugar industry = 36.9 thousand workers
World price = PW = 24.1 cents/pound Domestic (US) price with quota = PD = 29.8 cents/pound
Demand curve: P = 93.9 – 3.3Q, where P = price of sugar and Q = billions of pounds
Supply curve: P = 12.9 + 1.36Q
The supply and demand curves are approximations. Rather than using elasticity of supply and demand, I converted the equations to straight lines. This makes your calculations simpler.
A. Draw the standard graph for analyzing a quota. To keep the question simple, assume the US is a small country. In your chart, label PW (24.1 cents/pound), PD (29.8 cents per pound), quantity produced with a quota (12.4 billion pounds), quantity consumed with a quota (19.4 billion pounds), and imports with the quota (7 billion pounds). (Note: these numbers were given above.)
In later questions, I ask you to be sure to include the units. For this question, the appropriate units would be “cents/pound” and “billion pounds.” So, if the question asked for the quantity produced with a quota, the correct answer would be “12.4 billion pounds.”
Estimate the quantity produced if there were no quota and PW = 24.1 cents/pound. Show your calculations. (This allows me to give partial credit if appropriate. Be careful that you get the units correct.) Quantity produced = ___________________________
Estimate the quantity consumed if there were no quota and PW = 24.1 cents/pound. Show your calculations. (This allows me to give partial credit if appropriate. Be sure that you get the units correct.) Quantity consumed = ______________________________
B. Calculate the following quantities:
Calculate the change in consumer surplus from imposing the quota (be careful you get the units correct). Show your work. Using the standard chart for analyzing a quota for a small country, label the area that corresponds to the change in consumer surplus. I am looking for a numerical answer to this question. Be sure to include the units. Change in consumer surplus = __________________________
Calculate the change in producer surplus from imposing the quota. Show your work. Using the standard chart for analyzing a quota for a small country, label the area that corresponds to the change in producer surplus. I am looking for a numerical answer to this question. Be sure to include the units. Change in producer surplus = ____________________________
Calculate quota rents. Show your work. Using the standard chart for analyzing a quota for a small country, label the area that corresponds to the rents. I am looking for a numerical answer. Be sure to include the units. Quota rents = ______________________________
Calculate the net effect of quota (“dead-weight loss”). I am looking for a numerical answer. Be sure to include the units. Net effect = _______________________________
c. We now want to look at the effect of the quota on employment in the sugar industry. Let’s assume that output per worker in the sugar industry is constant. That is, Q/L = constant, where Q = sugar output and L = employment in the sugar industry. You don’t need to know that the constant is. The key point is that if Q/L is a constant, then the percent change in Q = the percent change in L, where percent change in Q = and similar for percent change in employment.
How many jobs were created in the sugar industry by the imposition of the quota? I am looking for a numerical answer. Be sure to include units. Jobs created = ______________________________
Use your estimate of costs to consumers to determine the “consumer cost per job created.” Be sure to include units. (Be sure to check your units.) Consumer cost per job created = __________________________
D. Imagine that you were the policy advisor to the US Trade Representative when the quota was being considered. Based on your analysis, would you recommend imposing the quota? What do you base your recommendation on? Your discussion should include the economic effects of the quota. But it should also include the political effects of the quota.