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Classification of Price Policies
The influences of commodity price policy can be studied under several simplifying assumptions. Because emphasis is on national government actions, it is convenient to illustrate the effects of different commodity policies with diagrams depicting the price and quantity of a single commodity in a national market. It is assumed that the commodity is internationally tradable. Whether the country is an importer or an exporter and how much it imports or exports are issues addressed in the analysis, but the assumption is that international transfer costs are small enough to allow profitable foreign trade. Indeed, for simplicity of presentation, these costs are assumed to be zero so that the world price represents both the cif price for imports and the fob price for exports. Domestic marketing margins, market failures, and changes in demand and supply of related commodities are also ignored, again for ease of exposition. An additional assumption affecting the world price is that the country is sufficiently small in the world market that its international sales or purchases do not measurably affect the world price. This assumption about the smallness of the country is usually not crucial, but it permits simple graphical illustrations. In this circumstance, the country can import or export any quantity of the commodity at a constant world price, which can be represented by a horizontal line.
A classification of commodity price policies is presented in Table 3.1 to help explain the effects of policy changes. The table lists ten types of price policies, distinguished according to three criteria-type of instrument (subsidy or trade policies), intended beneficiary (producers or consumers), and type of commodity (importable or exportable).
Type of Instrument
The first criterion is the distinction between subsidy policies and trade policies. A subsidy is a payment from the government treasury. (A tax, which is a payment into the treasury, is thus a negative subsidy.) The rate of subsidy is the amount paid per unit of subsidized output, and the total subsidy is calculated by multiplication of that rate by the amount of subsidized production or consumption. The purpose and effect of a subsidy is to create domestic prices that differ from world prices; sometimes policies create separate domestic prices for producers and consumers, beyond the difference caused by a marketing margin.
A trade policy is a restriction placed on imports or exports of a commodity. The restriction can be applied to either the price of a tradable commodity (with a trade tax) or its quantity (with a trade quota) to reduce the amount traded internationally and to drive a wedge between the world price and the domestic price. For imports, trade policy imposes either a per unit tariff (import tax) or a quantitative effect, expansion of imports or exports, cannot, however, be created by trade regulations. Countries can and do subsidize imports or exports and expand their trade movements. But either of these actions is actually a subsidy policy and is already classified as such.
restriction (import quota) to limit the quantity imported and raise the domestic price above the world price. Trade policy for exports involves a limitation on the quantity exported through imposition of either a per unit export tax or an export quota, causing the domestic price to be lower than the world price.
Trade policies differ from subsidy policies in three respects. The first involves implications for the government budget. Trade restrictions either benefit or have no impact on the budget, whereas subsidies always use the government treasury to drive a wedge between world and domestic prices. With negative subsidies, the treasury benefits; with positive subsidies, the treasury loses. Some subsidies alter prices for domestic producers while permitting consumers to continue to purchase at the world price; other subsidy policies permit producers to continue to receive the world price but alter prices for consumers. Some subsidy policies affect both groups. As a result, the effects of subsidies on the treasury vary widely in magnitude.
The second difference is reflected in the number of alternative subsidy and trade policies. Eight types of subsidy policies exist because either producer or consumer subsidies can be applied to both importables and exportables. In each instance, subsidies can be positive or negative. However, there are only two basic types of trade policies-restrictions on imports and controls on exports. Trade flows of imports or exports can be restricted by trade taxes or quota policies so long as a government has effective mechanisms to control smuggling. The opposite effect, expansion of imports or exports, cannot, however be created by trade regulations. Countries can and do subsidize imports or exports and expand their trade movements. But either of these activities is actually a subsidy policy and is already classified as such.
The final difference between subsidy and trade policies concerns the extent of their applicability. All goods and services are either tradable or nontradable, depending on comparative levels of domestic costs of production and international transfer costs. By definition, a trade policy can apply only to a tradable good, since restrictions can be imposed only if trade flows exist. Subsidy policies, however, can be applied to all goods, including nontradables. Initially, the discussion of policy effects is restricted to tradables-importables and exportables-to permit comparison of subsidy and trade policies.
Beneficiary Group
The second criterion for policy classification is whether the policy is intended to benefit producers or consumers. A subsidy or trade policy causes transfers among producers, consumers, and the government treasury. Unless the government budget pays for the entire transfer, when producers gain, consumers lose, and when consumers gain, producers lose. It is tempting to describe this situation as a zero-sum game in which gains for one group are just offset by losses for another. But the transfers are accompanied by efficiency losses, so gainers gain less than losers lose. Hence, the benefits for one group (producers, consumers, or the government treasury) are less than the sum of the losses for the other groups.
Type of Commodity
The third classifying device is a distinction between importables and exportables. When there is no price policy, the price prevailing domestically is the world price-the cif import price for an importable or the fob export price for an exportable. Hence, a country imports some of its importables and exports some of its exportables unless the government intervenes. Producers gain and consumers lose with policies that raise domestic prices for either importables or exportables, whereas consumers benefit and producers are hurt with policies that lower domestic prices of either kind of tradable good.
In Table 3.1, the three classification criteria are described with a shorthand notation, given in parentheses with each entry in the table. The first letter in each three-letter symbol refers to whether the entry is a subsidy policy, S, or a trade policy, T; a superscript + is added to the S to denote positive subsidies, and a superscript - is used to denote negative subsidies (taxes). The second letter signifies whether the policy is intended to affect producers, P, or consumers, C; and the third letter identifies the affected commodity as being an importable, I, or an exportable, E. For example, the policy to restrict imports is labeled TPI, because it is a trade policy benefiting producers by raising the domestic price of importables.
S = Subsidy policy (+ = positive subsidy, - = tax). T = Trade policy.P = Affecting producers. C = Affecting consumers. I = Of importables.E = Of exportables.
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