Agriculture Reference
In-Depth Information
prices, but that of corn and soybean is higher. Imports will be significantly
smaller than in the first case. However, because the remaining quota can be
used at any time when the domestic price is going up, the effects of imports
will be similar to that in the first case, that is, they prevent the domestic
price from recovering instead of pushing the price down. Therefore, for
simplicity, only the first case is discussed in the following.
The mpact on domestc producton
How much grain production declines due to the price reductions will
depend on the prce elastcty of supply. Accordng to the estmate by
Wang (2001), the total price elasticity of grain supply is 0.52, and the
effect of prce changes on output wll be fully realsed wthn two years.
Based on this elasticity, grain output will decline by 6.2 per cent in two
years. There s lkely to be a 'cobweb effect' because the prce elastcty of
demand is smaller than that of supply. In a standard 'cobweb effect' case,
both production and price fluctuate to a larger and larger extent and can
never converge to the equilibrium. However, this effect can be reduced by
government operaton of a prce stablsaton scheme and mprovement n
information services to grain producers. For simplicity, we may consider
the case where, on average, the price level declines by 6 per cent and
output falls by 3.1 per cent as an equilibrium result.
10
Producer losses
The producer losses can be approxmately derved from the followng
formula
(Prce before shock) x (percentage prce reducton) x (volume of
market grain before shock - net imports) + (Output reduction) x
(domestic price after shock) - (material input cost) + (fixed costs that
cannot be reduced) - (net incomes from new jobs after shock).
Using the 2000 production and consumption data, we can calculate
[1,815 x 6 per cent x 215 + (462 x 3.1 per cent) x 2006 x (1- 6 per cent
- 40 per cent + 10 per cent)] x (1 - 30 per cent) =28.0 (billion yuan)
