Wednesday, February 23, 2011

Government Bans and Economic Welfare

Europeans claim that Russia restricts Europeans ability to export pork to Russia by invoking rules that state that European pork is unhealthy or unsanitary. A European official said it seems arbitrary, and these type of bans are examples of reductions in trade leading to reductions in economic welfare. How?

Suppose that Russia invokes another ban on the importing of pork and assume that it is arbitrary. If this is the case, then the supply curve for imported pork in Russia shifts to the left, and prices rise. This results in a decrease in consumer surplus and an increase in producer surplus. The problem is that the increase in producer surplus is inefficient. If it was not, then there would be no need to arbitrarily impose a ban on imported pork, since domestic producers can produce at lower marginal costs than imported pork producers. So while producer surplus will increase for domestic (Russian) pork producers, overall economic welfare would be even greater since the imported pork would result in an overall lower price than without the pork importing ban.

No comments: