All entries for December 2007
December 30, 2007
The following is from Greg Mankiw’s blog:
China, the world’s biggest grain producer, will tax exports of wheat, corn and rice to increase domestic supply and control rising food prices. Exporters of wheat will start paying a 20 percent tax on Jan. 1, while the tax for corn and rice was set at 5 percent, the Finance Ministry said.
Draw the graph that describes the market for grain in an exporting country. Use your graph to answer the following questions.
1) How does an export tax affect domestic grain prices?
2) How does it affect the welfare of domestic consumers?
3) How does it affect the welfare of domestic producers?
4) How does it affect government revenue?
5) What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?
December 07, 2007
Recently Sainsbury and Asda admitted to fixing the prices of milk and cheese to high prices (e.g. +3p of a pint of milk, +15p for a quarter-pound of butter, +15p for a half-pound of cheese). This was after an OFT (Office of Fair Trading) investigation, and now they have agreed to pay fines totalling at least to £116 M. Tesco and Morrisons are also under investigation, although they haven’t admitted to anything yet.
However apart from this being a simple case of a nasty capitalist conspiracy to rip off the consumer, I think the case well reflects the complexity of the modern economy; where it is characterised by nexuses of strategic decision making power.
A play of many actors.
In recent years, because of foot and mouth, British dairy farmers have been having a bad time. The supermarkets has said that their actions were to help give British farmers more money. Lobbying by interest groups could have led to this seemingly altruistic act. Dairy Crest (also part of the plot, fined: £9M) said: “The implementation of these initiatives was very well publicised at the time and received widespread support including strong political backing”.
Its common knowledge that the farming community is very well politically organised (i.e. CAP). Thus it isn’t implausible to imagine that during this industrial depression rural MPs spent their efforts trying to lobby supermarkets. Indeed the National Farmer’s Union has refused to comment on the OFT’s hearing, perhaps because they want to hide their dirty hands?
OFT as a clunking fist?
The OFT’s mandate is to break up collusive agreements that leads to higher prices for the consumer. Thus witnessing this agreements they have, regardless of the broader welfare consequences, exploited their power to break the collusion up. But it shouldn’t be forgotten that the OFT is a de facto politically accountable organisation. If the rural MPs were politically strong enough then it’s likely that they could have guided the OFT to be much more sympathetic.
For instance it’s doubtful whether the competition commission would have behaved similarly in France. Plus if the case was the military and BAE systems, instead of milk and the supermarkets, it’s likely that OFT would be much more sympathetic again, as the government would be much more accountable to the industry in question.