A Homework Problem from China
This news story suggests a good homework problem extending the analysis:
China, the world's biggest grain producer, will tax exports of wheat, corn and rice to increase domestic supply and control rising food prices. Exporters of wheat will start paying a 20 percent tax on Jan. 1, while the tax for corn and rice was set at 5 percent, the Finance Ministry said.Draw the graph that describes the market for grain in an exporting country. Use your graph to answer the following questions.
- How does an export tax affect domestic grain prices?
- How does it affect the welfare of domestic consumers?
- How does it affect the welfare of domestic producers?
- How does it affect government revenue?
- What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?