Under pressure from the sugar lobby, which feared a flood of sugar entering thro
ID: 1212338 • Letter: U
Question
Under pressure from the sugar lobby, which feared a flood of sugar entering through Mexico, the U.S. Congress demanded limits on the amount of sugar that Mexico could export to the U.S. as a condition for passing the North American Free Trade Agreement (NAFTA) in 1993. When those limits expired, which occurred at the beginning of 2008, Mexicans or the Mexican government could have, in principle, purchased sugar on the world market to re-export to the U.S. to sell at the higher, quota-supported U.S. sugar price. Mexican sugar exports to the U.S. did indeed increase following expiration of the limits, from about 4.9 million cwt in 2007 to 14 million cwt in 2008 and then to 28 million cwt in 2009, before falling back to 16 million cwt in 2010. Since 2008, U.S. policymakers have complained that the growth and high variability of Mexican sugar exports to the U.S. have complicated their ability to set quota levels to achieve desired sugar prices, leading to calls for some form of coordination between Mexico and the U.S. One such proposal would have required the U.S. and Mexican governments to consult at least every three months to review data on both countries’ sugar markets; to establish a permanent joint sugar commission to coordinate national sugar policies, monitor implementation of the framework’s objectives, and handle any disputes that may arise under the framework; to consult about the likely impact of future trade agreements on how their sugar programs work; and to work together to improve the collection and publication of reliable data on each country’s sugar supply and use, including mandatory and enforceable reporting requirements for sugar producers. At the time of the expiration of limits on Mexican sugar exports to the U.S.,
the U.S. consumed 200 million cwt (“hundred weights” = 100 lbs) of sugar per year, of which U.S. producers produced 160 million cwt, with the remainder, including 4.9 million cwt from Mexico, imported from other countries holding U.S. quota rights;
the price of sugar in the U.S. was $20.00 per cwt (20 cents per pound);
the world market price of sugar was $14.00 per cwt;
the elasticity of demand for sugar in the U.S. was 0.15;
the U.S. elasticity of sugar supply was 0.25.
Since U.S. consumes only about 4% of world sugar production, assume that changes in U.S. sugar imports will not affect the world market price.
Suppose, following the expiration of limits on Mexican sugar exports to the U.S., anyone in Mexico could have bought sugar on the world market and then exported it to the U.S. Calculate the effect this would have on the U.S. consumer surplus.
(Please only answer if you know how to solve this)
Explanation / Answer
Consumer surplus implies to situation when consumers are willing to pay more for goods & services than they currently pay. We assume that a single country's production of a commodity is relatively small to total world production. Thus, equilibrium price of the commodity in the world as a whole is not changed by the policy of a single country. In this case of sugar policy, the importing country, Mexico suffers welfare losses because producing firms are protected at the expense of consumers. Exporting country, U.S., receives higher prices caused by import restriction.
The TRQ (Tariff rate quota) imposed upon sugar exporters by the United States takes the form of zero in-quota tariff and an over-quota tariff that is almost prohibitive. The U.S. TRq is based upon the allocation that foreign exporters do not have to pay for quota license and thus able to capture the quota rent.
Increase in U.S. domestic price would have caused consumer surplus to decrease which would cause net loss in the U.S. welfare. However, Mexican consumer surplus would have increased. However, increase in consumer surplus would result in higher consumption rate of sugar for consumers within the United States. This will increment real income and purchasing power which raises the amount of all goods consumed within the country.
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