Multiple Interventions

The analysis of commodity output and input policies has focused on the effects of single interventions. But governments can, and often do, impose multiple interventions on commodity systems. In these cases, the effects of the component commodity policies are added together to identify gainers and losers from policy. With multiple interventions, consumers and producers may both gain or both lose.

Figure 3.5 illustrates the possibility for tradable-commodity subsidy policies. In Figure 3.5a, both consumers and producers receive positive subsidies; this panel is a combination of the two policies described in Figures 3.1a and 3.1c. The import subsidy policy increases consumption from Q₄ to Q₃ and, in isolation, would reduce domestic production from Q₁ to Q₂. But with an S₊PI policy introduced for producers, production increases from Q₁ to Qz. Total imports, Q₃ - Q2, could be greater or smaller than imports before policy. Transfers from the treasury go to consumers, P_wABP_c, and to producers, P_PEFP_w. The government pays two subsidies for domestic production, one to producers and one to consumers. Efficiency losses are found in consumption (GAB) and in production (HEF).

In Figure 3.5b, both groups are taxed relative to the world price. Governments impose a tax on consumption of the commodity (such as a trade tax), raising consumer prices from P_w to P_c. Total consumption declines from Q₄ to Q₃. Conducted in isolation, this policy (TPI) would benefit domestic producers. But the government is assumed to be capable of imposing a producer price, P_P, that is below the world price (S_-PI), causing domestic production to decline from Q₁ to Q₂. As before, the effect of the dual policies could either raise or lower trade volume. But in this case, the government treasury gains-FEBC on imports, P_wP_cEF on consumption of domestic production, and the tax on production, P_pP_wFG. Domestic production is taxed twice, with the government receiving one part from domestic producers and the other from domestic consumers. Efficiency losses are ABC (consumers) and FGH (producers).

In this example, multiple interventions maintain or increase the sources of efficiency losses; both producers and consumers incur such losses. But it is possible for subsequent interventions to exercise a more benign role, offsetting part of the efficiency losses created by the initial policy intervention. Figure 3.6 illustrates this result. Figure 3.6a reproduces the S+CI policy of Figure 3.1c. Initially, both taxpayers and producers suffer efficiency losses as a consequence of import subsidies. But in Figure 3.6a, the government is assumed to implement a price support program in which producers are offered the world price. In this case, production remains at Q₁, the output level dictated by world prices, and the economy avoids the production efficiency loss (BAF). Only the taxpayer efficiency loss (EGH) remains. Because the producer price program does not subsidize producers relative to world prices, it is classified as a benign transfer.

Figure 3.6b reproduces the S+PE policy of Figure 3.1 b, the remaining case in which a positive subsidy policy creates efficiency losses in production and consumption. In this case, the benign transfer policy is a subsidy to domestic consumption, so that consumers pay world prices and only producers receive the higher domestic price. The combination of policies avoids the consumer efficiency loss (GHE), leaving the economy with only the producer efficiency (AFB)