WTO makes progress in cutting farm subsidies

[Lawrence of Arabia]

they will get more income if they can sell more, which is what will happen when subsidies are reducd.

[Japher]

they will get more income if they can sell more, which is what will happen when subsidies are reducd.

That's a rather blind statement, don't ya think?

Subsidies drop, supply increases, prices drop... They will sell more, for sure, but will they make more? Probably not.

[Kidlicious]

Originally posted by Lawrence of Arabia
they will get more income if they can sell more, which is what will happen when subsidies are reducd.

I don't want to try to make you understand. You either have no understanding about the simple laws of economics, or you have a very hard time losing an argument, which causes you to be dishonest.

[Adam Smith]

Cotton Subsidies

Kid and LoA each have it about half right. Here is a rough sketch of what is going on.

The graph shows the US cotton market. The price of cotton is on the vertical axis, while quantity is on the horizontal. The domestic supply curve is S, the domestic supply curve with subsidy is S’. If the subsidy is $t per ton, then S’ is $t below S. In other words, domestic producers will supply a given quantity at $t less than they used to because they can pocket the subsidy. Pw is the world price, and there is assumed to be a perfectly elastic supply at this price. Initial equilibrium is at e. Domestic producers produce 0Q” tons of cotton, earning $0Q”cPw in revenue, and earn profits equal to ae’Pw. Domestic producers receive a subsidy equal to abcd, which is paid to them by taxpayers. The US imports Q”Q”’ tons of cotton from foreign producers, earning them $Q”Q”’ec in revenue.

Now the subsidy is removed. Supply shifts upward by $t to the true supply curve, S. US domestic production falls to 0Q’, and domestic earnings fall to $0Q’e’Pw. Imports increase by the amount Q’Q”, increasing foreign producers earnings by $Q’Q”ce’. Domestic producers lose the abcd subsidy, an amount exactly equal to what is saved by US taxpayers, so this is a wash. Overall the US economy (and the world economy) saves bce’, which is the cost of excess US production which could have been produced less expensively elsewhere in the world.

In sum, the price paid by consumers remains the same, foreign farmers sell more cotton to the US, and worldwide less resources are wasted on subsidized production.

edit: formatting

[Adam Smith]

Wheat Subsidies

The story is a little bit different in the Mali wheat market. The price of wheat is on the vertical axis, while the quantity is on the horizontal. The domestic supply curve in Mali is S, and the domestic demand curve is D. The subsidized world price is P’w, which is the net result of many different producers subsidizing wheat production. Initial equilibrium is at e, with 0Q’ supplied by domestic producers, and Q’Q”” imported from abroad.

Now the subsidy is removed. Supply shifts upward to the true world price, Pw. Equilibrium is now at e’. Domestic production increases from 0Q’ to 0Q”. The revenues of farmers in Mali increase to 0Q”aPw, and their profits increase from fdP’w to faPw. Imports decline from Q’Q”” to Q”Q”’. Consumers in Mali now pay abce’ more for their imports of wheat, an amount equal to the savings to foreign taxpayers, who no longer have to pay for the subsidies. From the worldwide point of view this is a wash. Overall consumption of wheat declines from Q”” to Q”’ as consumers in Mali react to higher wheat prices. There is a net loss of $e’ce for Mali consumers who no longer buy wheat. But there is a net gain of $e’ge worldwide because world producers are no longer producing wheat at a price greater than what consumers are willing to pay for it.

In sum, the price earned by Mali farmers and paid by Mali consumers increases, the amount of imports decreases, and worldwide less resources are wasted on subsidized production.

edit: formatting

[Kidlicious]

Re: Cotton Subsidies

Originally posted by Adam Smith
In sum, the price paid by consumers remains the same, foreign farmers sell more cotton to the US, and worldwide less resources are wasted on subsidized production.

Well if the subsidies aren't significant enough to affect the world price then what you say is true, but then the amount of extra production by the rest of the world will be small too.

[Lawrence of Arabia]

In sum, the price paid by consumers remains the same, foreign farmers sell more cotton to the US, and worldwide less resources are wasted on subsidized production.

[Kidlicious]

No one here was assuming that the subsidies aren't significant enough to affect the world price. Under the assumption that the subsidies affect the world price the price will of course change when the subsidies are removed and the demand curve is not horizontal.

[Lawrence of Arabia]

btw, which program did you use, AS, to make that graph. was it powerpoint?

[Lawrence of Arabia]

ah, but i did.

from earlier

since world supply is considered infinite.

[Kidlicious]

Originally posted by Lawrence of Arabia
ah, but i did.

from earlier

'since world supply is considered infinite.'

You're the only one considering supply infinite, I'm sure. I meant that the assumption is more commonly that the US and EU are dumping cheap food on the third world, not that the subsidies are insignificant.

[Lawrence of Arabia]

ah, but look at the cotton graph - the price remains the same, but forign farmers sell more, and have higher revenues, because Pw doesnt change with or without the subsidy, because its perfectly elastic, because supply is infinite.

[Kidlicious]

Originally posted by Lawrence of Arabia
ah, but look at the cotton graph - the price remains the same, but forign farmers sell more, and have higher revenues, because Pw doesnt change with or without the subsidy,

First, a graph is different from reality. The graph is drawn under the assumption that the US could not supply enough food to the world to affect the world price. This isn't necessarily true. It's just an assumption. Maybe the world price is affected a little, but so little that it shouldn't be of concern.

Originally posted by Lawrence of Arabia
because its perfectly elastic, because supply is infinite.

Supply isn't assumed infinite, only too large for the domestic producers to affect the price.

[Lawrence of Arabia]

First, a graph is different from reality. The graph is drawn under the assumption that the US could not supply enough food to the world to affect the world price. This isn't necessarily true. It's just an assumption. Maybe the world price is affected a little, but so little that it shouldn't be of concern.

ah, but its not food - its cotton. and the graph is a model, one which is similar to reality, in many, but not all cases.

Supply isn't assumed infinite, only too large for the domestic producers to affect the price.

which is the same thing. the fact is that if the cotton subsidy is removed, price remains the same, but there will be more sales and more revenue going to foreign farmers, which will help them out and help third world countries.

[Kidlicious]

Originally posted by Lawrence of Arabia
ah, but its not food - its cotton. and the graph is a model, one which is similar to reality, in many, but not all cases.

The assumption is different from reality. You're arguing about what the assumption is, not whether price really remains constant. You can't make an assumption and call it proof.

Originally posted by Lawrence of Arabia
which is the same thing. the fact is that if the cotton subsidy is removed, price remains the same, but there will be more sales and more revenue going to foreign farmers, which will help them out and help third world countries.

I'm arguing that if you assume that the subsidies are so insignificant that they don't affect the price, then you can't honestly argue that removing them will help the third world. You're contradicting yourself.