5. Agricultural liberalization in China

Suppose the demand curve for rice in China is given by the equation Qo=100-10P, where Qp is in

million tons per year and P is in thousand yuan per ton of rice. The supply curve is Qs=20P-20.

Suppose further that the government arranges for the farmers to supply a total of 40 million

tons of rice a year, and it pays farmers a fixed price of 2,000 yuan per ton. The government

then sells the rice in the urban areas for 3,000 yuan a ton.

a. What will be the consumer surplus, producer surplus and government

revenue under this scheme?

b. Is the scheme efficient? If not, what is the deadweight loss?

Under a "household responsibility" system intended to boost production and alleviate

shortages of food, the farmers still have to supply the earlier quota to the government for the

same price, but now they are free to produce more than the quota, and they can sell the

surplus in a free market. The government still buys the 40-million-ton quota at 2,000 yuan/ton

and resells it at 3,000 yuan/ton.

c. How much will the farmers produce under the new system? What will be the

free market price?

d. Is the new system efficient? If not, what is the deadweight loss?

e. What are the consumer surplus, producer surplus, and government revenue

under the new scheme?

f. Who wins and who loses compared to the original system from parts a.-c.?