Assignment:
MARKET AND EXTERNALITIES
Context
Australian farmers have been experiencing the worst drought of the past century (McCormack 2018). In August 2018, it was reported that 98 percent of NSW and almost two-thirds of Queensland is either in drought or is drought affected, with farmers in parts of Victoria, South Australia and Western Australia also suffering (Carey 2018). Some areas have even been in drought for periods ranging from one year to seven years. Farmers in these areas are losing their livestock as they struggle to feed and water them amidst increasing costs of stock feed and transportation.
Questions
1. Using a diagram showing demand and supply curves, illustrate and explain how the drought affects market prices, market quantities, consumer surplus and producer surplus for an agricultural product.
2. Using a diagram showing demand and supply curves, illustrate and explain how a government subsidy given to the farmers for an agricultural product will affect the product's market prices, market quantities, consumer surplus and producer surplus.
Identify and explain the differences in the agricultural product's market prices, market quantities, consumer surplus and producer surplus if the government subsidy was given to consumers instead of farmers.