Putin and Wheat Pt 1

by Shihang

What really happened was that Putin banned exports of wheat. But what if Putin decided to go with a price ceiling instead? What can H2 economics tell us?

Assumption:
There is no external sector (i.e. there is no trade).

[Insert diagram]

Notes:
There will be a shortage. Q will fall from the equilibrium quantity, meaning that even less wheat will be sold.
Price will however be lower.

Thus, from the diagram, we can see that this is not a pareto efficient policy, as producers become less well off.

It is not even Kaldor-Hicks efficient (Pareto with redistribution) due to the deadweight loss.

What about us having less wheat! However, in the SR, PES suggests that the fall will be smaller than the change in price.

Also, “less wheat sold” does not mean “less people have wheat”. It is possible more people are consuming wheat, but less wheat on aggregate. Put in other words, it is possible (depending on the system of distribution) to decrease starvation and the food supply at the same time. How? Changing the distribution of food.

On a related note, factoring in the diminishing returns of utility, it is possible that such a market-based redistribution (or change in distribution patterns) can lead to an increase in Benthamite utility.

What about the decrease in producer surplus that is not offset by anything? Subsidise agriculture. Even more, if possible, as Putin has done.

 

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