in 1995, mango production in kenya fell by approximately 85% following a flood. the retail price of mangoes rose by a factor of 3. the huge increase in price was due to a ban on imports of...

a) Given in the problem that almost 90% of the Banana crop had been destroyed in the
cyclone, this would mean that in the local market supply would have contracted drastically
and as such the domestic market supply curve will shift from S to S1 i.e. leftwards/upwards
as below:
Autarky: Under autarky, as the domestic supply in the market falls, the market equili
ium
shifts from point E1 to E2, and as such the equili
ium prices rise in the market rises five
times, from P1 to P2. Here the area PP2E2 represents the Consumer Surplus of $585m which
has fallen from PP1E1 and area CP2E2 represents the producer surplus of $135m as
compared to DP1E1 before the disaster.
Free Trade: Now under free trade, let us assume that before such catastrophe the initial
market price in the country was same as the International price. And as such under Free
Trade, the quantity of import would be to that extent, till the domestic prices come down
ack to P1 or the international level, which is shown below:
From the above diagram we see that, the new market price is back to P1. However the
quantity supplied by domestic suppliers is only to the extent of size OA and remaining AE3 is
imported. As such the Consumer surplus has increased from PP2E2 to PP1D i.e. by $175m,
F D
E3
E2
C
A
D
S1
P1
P2
P
Q
O
Q
C
D
E1
E2
S1
S
P1
P2
P
D
and as such the producer surplus of domestic producers falls from CP2E2 to CP1F i.e. by
$66m.
) Given the above data and the assumption, that the initial market price of Australia was same
as the world price, there seems to be no requirement of any policy action. Reason being that
any policy action like an Import Tariff or Quota or a Complete Ban on the import will only
esult to increased dead weight loss as shown below (Paul Deng, Oct 2011). (Ignoring gains
from Terms of Trade):
From the above it is clear that as tariff is imposed, the domestic price will rise above the
international price by the amount of tariff, though it may be less than P2. As such the new
price is now P1+t, and therefore the consumer surplus falls by area R+S+T+U, out of which
area R is re-gained as Producer Surplus. Area T is re-gained as Tariff revenue by the
Government. However if the government tries to protect the farmer by imposing a Tariff it
will have to suffer a dead weight loss of S+U (Paul Deng, Oct 2011). In fact, if the
government replaces the tariff with a Quota it would further increase the loss by T. On the
other hand a complete ban would make the consumers worse off, and the overall welfare of
the economy would be low, as indicated by the data where the net welfare increases by (
175 – 66 = $109m) due to free trade. Also it is to be noted that for a small country, tariffs
are always welfare reducing (WMU). As such free trade is advisable. However, if the
government is more concerned about the long-term existence of the banana industry, it
should go for an Import Tariff, as that would restrict the import quantity due to market
demand supply mechanism, and as such dead weight losses would be lesser than that under
a complete ban or a quota.
But if the world prices initially may be lower than the domestic prices, the government
should go ahead with the Import Tariff plan, as in that case, the requirement of protection
y the farmers would be more, as they would not be able to compete in the international
market and the industry would perish.
Q2 Q1
U S
P1 +t
E3
C
A
D
S1
P1
P2
P
Q
O
R T
So the policy decisions are dependent on the world prices and domestic prices pre and post
this phenomenon and the level of Imports and dead weight losses under both the
conditions.
(The answer is based on considering that...