Price policy analysis in a

closed economy setting

Economics of Food Markets
Lecture 13
Alan Matthews
 Policy instruments
• Consumer subsidy
• Producer direct payment
• Input subsidy (e.g. fertiliser subsidy)
• Production quota (supply control)

• Purpose is to be able to the price and

quantity (allocation) effects as well as the
benefits and costs (welfare effects) of
each instrument
 Policy interventions
• In the standard supply and demand market diagram,
policy interventions are often represented by shifts in
demand or supply curves which change the equilibrium
price and quantity traded
• Interventions can take the form of a fixed or proportional
tax or subsidy
– Consumer subsidy of 50c per kg of flour, a fixed or specific
subsidy, causes a parallel shift in the demand curve
– Consumer subsidy of 50% of the price of flour, a proportional or
ad valorem subsidy, causes a rotation of the demand curve
• The resulting welfare changes are measured as the
changes in producer surplus, consumer surplus, and
taxpayer revenues.
Example: Specific consumer
subsidy on flour
P

Pp
a b
P0 e Value of specific subsidy
c d
Pc D1

D0
Q0 Q1 Q
Example: Ad valorem consumer
subsidy on flour
P D1

D0

Pp
a b
P0 e Value of specific subsidy
c d
Pc

Q0 Q1 Q
Example: Fixed direct payment per
tonne to producers
P

S0

S1

Pp
a b
P0 e Value of fixed payment
c d f
Pc

D
Q0 Q1 Q
Example: Unit fertiliser subsidy
P S0

S1

P0 f
a bc
Pm g
d e

D
Q0 Q1 Q
 Example: Production quota with
efficient allocation of quota reductions
Example: Production quota with proportional
allocation of quota reductions