Page 141 - Krugmans Economics for AP Text Book_Neat

Section 2 Summary

buying up the surplus farm products. At other times, it has d.What are the inefficiencies that arise in each of these cases
used target prices, giving the farmer an amount equal to the (parts a and b)?
difference between the market price and the target price for
19. The waters off the north Atlantic coast were once teeming with
each unit sold. Use the accompanying diagram to answer the
fish. Now, due to overfishing by the commercial fishing industry,
following questions.
the stocks of fish are seriously depleted. In 1991, the National
Marine Fishery Service of the U.S. government implemented a
Price of corn
(per bushel) S quota to allow fish stocks to recover. The quota limited the
amount of swordfish caught per year by all U.S.-licensed fishing
$5
boats to 7 million pounds. As soon as the U.S. fishing fleet had
4 met the quota, the swordfish catch was closed down for the rest
of the year. The accompanying table gives the hypothetical de-
3 E mand and supply schedules for swordfish caught in the United
2 States per year.
1
Quantity of swordfish
D
0 Price of swordfish (millions of pounds per year)
800 1,000 1,200
(per pound) Quantity demanded Quantity supplied
Quantity of corn (bushels)
$20 6 15
a. If the government sets a price floor of $5 per bushel, how
many bushels of corn are produced? How many are pur- 18 7 13
chased by consumers? by the government? How much does 16 8 11
the program cost the government? How much revenue do 14 9 9
corn farmers receive?
12 10 7
b.Suppose the government sets a target price of $5 per bushel
for any quantity supplied up to 1,000 bushels. How many
bushels of corn are purchased by consumers and at what a. Use a diagram to show the effect of the quota on the market
price? by the government? How much does the program cost for swordfish in 1991.
the government? How much revenue do corn farmers receive?
b.How do you think fishermen will change how they fish in
c. Which of these programs (in parts a and b) costs corn con- response to this policy?
sumers more? Which program costs the government more?
Explain.

Summary 99