a) The government has imposed a price floor on the rice market. Two outcomes are possible from this. If the price floor is beneath the market equilibrium value the market will naturally move prices up to the equilibrium value. In this circumstance the price floor has no affect. In this case the Thai government's market floor of 15,000 Baht per tonne is said to be above the equilibrium price. This results in a binding constraint in the market; as the price tends towards the equilibrium it stops at the price floor. This results in a surplus in quantity as the demand is lower than the supply.
1)Price Floor Beneath Equilibrium 2)Price Floor Above Equilibrium
b) Before the price floor(above the equilibrium) was set the market price and quantity would tend towards the equilibrium point. After the price floor of 15,000 Baht per tonne was set, the market price could only decrease to the floor but could not go to the equilibrium price and quantity as shown in graph 2. This results in a surplus of rice in the market which the government then buys at 15,000 Baht rate. This would not stimulate local demand for the product as buyers in the market would be unwilling to pay at the price floor. If government’s purchases will be resold at an equal or greater price then there would be little cost to the government but if it is being sold at a lower price or not being sold on the international marker business from exports is being lost and the government is accruing debt even though rice farmers are profiting in the short term.
Before Trade After Trade Government Intervention Change
Consumer Surplus A + B + C A + B A -(B)
Producer Surplus D C + D + F B + C + D + E + F +(B + E)
Total Surplus A + B + C +D A + B + C + D + F A + B + C + D + E + F + E
c)The producer surplus would increase as they are able to sell it at a higher price than they were willing to sell it for. In comparison it should decrease consumer surplus, and rice farmers aren't supplying directly to the world market, as less buyers are able to buy it at a price lower than or equal to the amount they were willing to pay. How total surplus is affected depends on the elasticity of the curves. If the demand curve is inelastic then the price floor would have little effect and there would be a greater overall surplus, while if the demand curve was elastic then the price floor would largely affect the consumer surplus and would reduce the overall surplus. Another assumption maybe that all of the governments stock will be resold at an equal or higher price. If this isn't the case then the government will be accruing debt and to resolve this may increase taxes on earnings to pay off the debt resulting in a reduction of wellbeing as the taxed money isn't being invested in projects that benefit the entire society.
2)a) If a farmer decides to continue or increase water consumption for his or her own farm it would have a negative external affect as it reduces the amount of...