IB Economics HL 2.11 Market failure - market power Question Bank

Study the following extract and data and answer the questions that follow.
Filipino rice farmers prepare for trade liberalization

(1) To meet its obligations under World Trade Organization (WTO) rules, the president of the Philippines has asked the government to eliminate the current quota system for rice imports. As an important part of food security measures, the government wants to achieve self-sufficiency in the production of rice. To support this goal, the WTO allowed the Philippines to extend its rice quota until June 2017 to allow more time for local farmers to prepare for free trade.

(2) The current quota system for rice imports makes domestic prices rise dramatically during periods of low domestic supply.

(3) Eliminating the quota on rice aims to make the rice market more competitive, which could reduce the price of rice by as much as 7 Philippine pesos $\left(\mathrm{PH}^{\mathrm{P}}\right)$ per kilogram (kg). The National Economic and Development Authority has estimated that lower rice prices could save Filipino households as much as PH 2362 per year. However, if the rice quota is eliminated, economists have warned that the government must prepare local rice producers so that they can either compete with rice imports or move to producing other crops. "Currently Filipino farmers cannot compete with Vietnamese farmers who may enjoy economies of scale" declared one economist. "The solution is to bring down the cost of production of rice."

(4) To help Filipino farmers to adjust to competition from lower-priced rice imports, the government has allocated funds to the Rice Competitiveness Enhancement Fund. This fund will provide support to farmers in order to increase productivity by supplying high-yield seeds and fertilizer. It will also provide subsidies to encourage the use of agricultural machinery and will offer support services and training to farmers.

(5) Apart from being an essential food for many Filipinos, rice is also an important input for the food industry. The plan to remove the import quota will reduce the inflation rate in the Philippines by up to 0.4 %. In July 2018, the central bank governor reported that inflation had reached 5.7 %, well above the government's target range of 2 % to 4 %. He stated that "supply-side factors are the main drivers of the present inflation. These factors include rising international oil prices, higher indirect taxes and poor weather conditions that have affected food supply". The president stated that the removal of the rice quota was one solution to ease the rising inflation.

Note that widgets and pidgets are imaginary products.

In the country of Burbia, the demand and supply of widgets are given by the functions

where Qd is the quantity demanded per month, Qs is the quantity supplied per month and P is the price per widget in dollars ($).

Study the extract and data below and answer the questions that follow.
American shrimp farmers taste victory

(1) American shrimp farmers have received good news from a United States (US) ruling that could lead to tariffs being imposed on imports from competing countries.

(2) US producers in the Gulf Coast were suffering from a significant oil spill in 2010. The higher fuel costs as a result of the spill have made it hard to compete with foreign shrimp farms, which they say receive government subsidies. The US producers claim such subsidies threaten to destroy the domestic shrimp business. The US imported 1200 million pounds (lb) of shrimp last year and produced 100 million pounds (lb) of shrimp domestically.

(3) The US Department of Commerce ruled that five countries - China, Ecuador, India, Malaysia and Vietnam - improperly subsidized shrimp that were exported to the American market. The department rejected accusations of improper subsidies by Thailand and Indonesia, two of the biggest US shrimp suppliers.

(4) The US International Trade Commission will now have to decide whether the subsidies harmed the American industry. If so, the US would impose tariffs on shrimp imports from the five countries. The proposed US tariffs could be as much as 54.5 %.

(5) The US shrimp farmers claim that the Indian government pays extra to cover shipping costs on shrimp going to the US and that China provides subsidized loans to its shrimp farmers. They argue that these violate World Trade Organization (WTO) rules.

(6) The five countries disputed the US Department of Commerce's decision. The Vietnamese producers state that, "This is an unfair decision affecting the lives of more than 600000 shrimp farmers and processors in Vietnam". Chinese officials have said that there was no evidence of improper Chinese subsidies and that US tariffs on Chinese shrimp would violate WTO rules.

(7) The US shrimp farmers say they need tariffs to allow them to compete fairly with Asian farmers, noting that high fuel prices are keeping some shrimp boats at the dock. "The price received by our farmers is not enough to cover their variable costs," said a lawyer, who represents the US shrimp farmers.

(8) Large US retailers and food distributors oppose the tariffs saying that the US shrimp industry had support from the oil company, BP, which has paid billions of US dollars to those affected by its 2010 oil spill.

(9) US politicians and shrimp farmers commented on problems they are facing, saying that, "not only is shrimping an industry, but it is a way of life".

In Ruritania, the demand for butter is given by the function

where Qd is the quantity of butter demanded per year, in millions of kilogrammes (kg), and P is the price of butter in dollars ($) per kg.

A report into fitness levels in the United States of America (USA) says that only about 23 % of all USA adults get the recommended amount of exercise. Walking, cycling, swimming, playing sports or doing domestic jobs such as gardening can all contribute to personal fitness. The following information is a cause for concern:
- Only one in three children are physically active every day.
- Less than 5 % of adults participate in 30 minutes of physical activity each day.
- Children now spend more than seven hours per day in front of a screen (for example, televisions, video game devices, computers).

At the same time, there has been a significant increase in demand for memberships at gyms (fitness centres), causing the fitness industry to grow by 8.7 % in the past few years.

Despite the increase in gym memberships, there is still concern about the lack of exercise in the USA. This is particularly important, as physical inactivity is estimated to result in USD 130 billion in annual healthcare spending and causes a significant reduction in the productivity of labour.

Figure 1 illustrates the market for gym memberships in the USA. D represents the demand for and S represents the supply of gym memberships. $D_{1}$ represents the increased demand for gym memberships in recent years.