China is a major producer of grains, such as wheat, corn,...

China is a major producer of grains, such as wheat, corn, and rice. Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports. a. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions. b. How does an export tax affect domestic grain prices? c. How does it affect the welfare of domestic consumers, the welfare of domestic producers, and government revenue? d. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?

China is a major producer of grains, such as wheat, corn, and rice. Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports.
a. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions.
b. How does an export tax affect domestic grain prices?
c. How does it affect the welfare of domestic consumers, the welfare of domestic producers, and
government revenue?
d. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?

Key Concepts

Deadweight Loss and Overall Efficiency

Deadweight loss represents the loss of economic efficiency that occurs when market distortions, such as export taxes, prevent some mutually beneficial trades from happening. In the context of an export tax, even though consumers may gain and the government collects revenue, the inefficiencies created by redirecting grain from the international market to serve domestic consumers typically result in a net decrease in total welfare.

Domestic Welfare Effects

Domestic welfare effects consider the impact of trade policies on consumer surplus, producer surplus, and government revenue. An export tax typically lowers domestic prices, which benefits consumers through increased surplus, but harms producers by reducing the revenue they earn. Although the government collects revenue from the tax, the shifts in surpluses can lead to an overall loss in economic welfare when the gains do not fully offset the losses.

Export Tax

An export tax is a tariff imposed by a government on goods as they leave the country. It aims to raise domestic supply by discouraging exports, which in turn can lower domestic prices. This policy tool is used to balance domestic consumption needs with the interests of producers who wish to sell in higher-priced international markets.

Market Equilibrium in International Trade

In an open economy engaged in exports, the domestic market equilibrium is influenced by both local demand and supply as well as the world market price. When an export tax is applied, it alters the relative profitability of exporting versus selling domestically, shifting the equilibrium. This leads to changes in the domestic price and quantity consumed and produced, as illustrated in supply and demand graphs.

Transcript

00:02 Now we have china introducing a tax on all of the grain exports from their country.

00:08 So first, let's look at before and then we'll see what happens after.

00:12 So in the before, we have our normal supply and demand, and that's domestic supply and domestic demand.

00:19 But then we also have the world price of grain because you'll notice that producers are going to sell not just to domestic consumers but to foreign consumers as well around the world.

00:30 So at first, what do we have? we have consumer surplus above the world price and to the left of the demand curve.

00:39 The producer surplus, on the other hand, is going to be everything below the world price and to the left of the supply curve.

00:54 All right.

00:55 So you'll notice we have this considerably large producer surplus and a rather large consumer surplus, relatively speaking.

01:02 Okay, so what is going to happen then when we introduce this tariff on all exports? well, essentially, you're going to have the world price drop.

01:16 Now, this is the price that sellers are actually receiving, okay? so while the going price and the world market stays the same, when the chinese exporter looks at what he's getting for actually selling his product, that price is falling because of the tariff.

01:34 And it's falling by the amount of the tariff.

01:37 So this area here bounded by the black dots, this is going to be tax revenue.

01:45 Okay? now, the consumer surplus is going to grow pretty substantially.

01:51 It's going to more than double.

01:53 So now it's everything above the green dash and to the left of the demand curve...

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