Economics Commentary †Russian Quota on US Pork and Indian Government Tax on cars Essay

A quota is a physical limit on the number or value of goods that can be imported into a country. This is one of the few protectionist measures that countries in order to protect their own domestic industries and is a measure that has been taken up by Russia, as seen in the article. Russia has reduced its quota for American pork from 750,000 tonnes to 600,000 tonnes. This is because Russia wishes to become more self-sufficient in producing pork and thus improve their pork industry. As said in the article, this will be a big blow to the American producers of pork who already trying to recover from poor demand and prices, as well as high input costs. The effect of this reduced quota can be seen in Fig.1 below. As can be seen, the quota has been decreased from QD2-QS2 at a value of 750,000 tonnes to QD3-QS3 at a value of 600,000 tonnes. The deadweight loss (represented by the shaded area) has, as a result, increased from ABC to EBD and this is partly where the problem of quotas lies. The shaded area represents the inefficiency of the domestic producers and by decreasing the number of US exports coming in, they are increasing the reliance on domestic producers who may be more inefficient in comparison to the American producers. What could be potentially seen is an increased loss of world efficiency as the domestic producers would produce pork for higher minimum revenue than the American producers. Furthermore, QD3-QD2 tonnes of pork are not now consumed (150,000 tonnes) and this is a reduction in the consumer surplus, which is the extra utility gained by consumers from paying a price that is lower than that which they are prepared to pay. However, there are advantages to the quota for domestic producers. The initial quota allowed domestic producers to supply 0-QS1 and QS2-QD2 tonnes of pork at a price of WP+Quota. This quota meant that their revenue had increased but they will see their revenue increased further with the implementation of the lower quota. This is because they will be able to supply 0-QS1, QS2-QD2 and QS3-QD3 at a price of WP+ Decreased Quota. Foreign producers will now supply their quota of QS1-QS2 and receive a price of WP+ Decreased Quota. This should usually result in a fall in income, which would be detrimental to the American producers who are already suffering economic difficulties, but in theory this does not have to be. An alternative option that could be used by the Russian government is a tariff. This is a tax that is charged on imported goods would cause the world supply curve to shift upwards because it would be placed on the American producers as opposed to the Russia producers. The effect of a tariff can be seen below. The advantage of a tariff is that whilst the deadweight loss (shaded in red) of caused by the tariff would be the same as the one caused by a quota, the Russian government would receive a revenue equal to C. Furthermore, the revenue of domestic, Russian producers would increase by A+B+C, though the revenue of foreign, American producers will fall by C. However, there will be a fall in consumer surplus by D, due to the extra pork that will not be purchased resulting in a deadweight loss of welfare. However, as stated before, this would be the same if a quota is used. Furthermore, the implementation of a tariff is less likely to lead to the creation of a black market. This is because with an import quota there is a chance that there will be massive shortages of pork. Therefore, criminal organisations would see smuggling pork as a lucrative business opportunity. However, with a tariff such shortages are unlikely as it does not set a limit on the number of products imported. That being said, if a tariff is set at an unreasonably high rate then there is still a chance that a black market will open up. Nevertheless either form of protectionism has its disadvantages. Firstly, it leads to less choice for consumers and the lowered competition will see domestic firms become inefficient without any incentive to minimise costs. Moreover, protectionism distorts comparative advantage and this leads to the inefficient use of resources thus leading to reduced specialisation and a reduced potential level of the world’s output. Indeed protectionism could potentially damage economic growth. INDIAN CAR TAX Externalities occur when the consumption or production of a good or service has a spill over effect on a third party. If an externality is negative, then this spill over effect is in some way harmful. Therefore there has to be an external cost i.e. one that is borne by a third party, to add to the private costs of the producer or consumer in order to calculate the full cost to society. In the article, the negative externalities which are occurring in New Delhi, India stem from traffic congestion and air pollution. Fig.1 below shows the external costs of using cars. As seen in Fig.1, consumers will enjoy some of the private benefits of car travel but there will be external costs in the form of air pollution and traffic congestion. Consumers maximise their private utility and consume at the level where MPC=MSC=MPB thus leading to over-consumption of vehicle travel by driving Q25, 000 vehicles at a price of 25,000 rupees. As can be seen in Fig.1, the socially efficient output, i.e. when the full opportunity cost of an extra unit is equal to the value placed by society on its consumption or production, is Q*, as a result there is over-consumption of Q25, 000 to Q*. Furthermore, as a result of MSC being greater than MSB, there is a welfare loss to society. This is an example of market failure. In order to combat the effects of the vehicle use, the Indian government is charging citizens in New Delhi who own more than one car and are implementing a congestion fee. Two-wheelers that cost above 25,000 rupees will be taxed at a rate of four per cent whilst cars priced up to 6 lakh (600,000 rupees) will be increased to the same rate. Those costing between 6 and 10 lakh will be charged seven per cent tax. The effect that the increased tax should have on the use of two-wheeled vehicles is seen in Fig.2. As seen in Fig.2, the implementation of a tax will see the MPC curve move upwards to MPC + tax = MSC + tax. This will reduce consumption to the socially efficient output of Q* but the price will increase to 25,000 rupees plus tax. Therefore the government should receive more revenue which could be then used to further tackle the externalities. However, a problem that the Indian government will face is the fact that the demand for vehicle travel may be price inelastic. Therefore, the amount of people who will forgo vehicle travel will be insignificant and the quantity demanded will not fall to the socially efficient level. There are alternatives to congestion fees and taxes, with advertising being an example. The Indian government could fund positive advertising for substitute goods such as public transport or bicycles thus decreasing the consumption of vehicle travel. One of the problems with this solution is that the costs may be high and so taxes would have to be in place. Moreover, people may not care about the effects of vehicle travel and will therefore continue with their current mode of travel. Another solution could be for the government to restrict the number of driving licences. This is effectively a quota that would essentially see a decrease in the number of cars on the road. However, the problem of who to allocate these licences to arise and this could prove unpopular. Another alternative solution could be to heavily advertise public transport. This may reduce the number of cars on the road and would therefore see a reduction in the negative externalities created. However, for this to work, people would have to heed the advertisements advice and as it would not be compulsory, people may neither listen nor care to change their method of transportation. Overall, it looks like the Indian government’s decision to implement a car tax and congestion fee is the most viable solution because it is less likely to alienate the citizens of New Delhi when compared to curfews and is also more likely to see a decrease in consumption when compared to advertising.