As part of re-launching its commercial policy, the UK government considers what trade policy tools to apply for mushrooms. The government already commissioned an analysis of the demand and supply conditions on the mushroom market (see below). The Treasury asks you to write a report including the following elements:
- How will prices, quantities, and welfare change in the mushroom market if the government imposes a tariff of £75?
- Which trade model(s) are likely to be relevant in this market and why? Can you briefly summarize the main insights from those models in the context of this market?
- Please summarize the main arguments for and against the tariff. The government is interested both in how the tariff will affect welfare but also in how the tariffs will affect them politically.
- Britain considers signing a free trade agreement with Russia. Please evaluate the main potential effects of that agreement on the mushroom market.
Analysis of the mushroom market in Britain
Even though Britain’s climate is quite conducive for mushroom production and collection, domestic demand exceeds domestic supply. Therefore, the country imports huge amounts of mushrooms from Denmark (40%), Chile(40%), and Russia (20%). Britain already has a free trade agreement with Denmark but not with the other two countries.
UK mushroom producers can be divided into two large groups: small producers and those that produce on large farms. Large farms can be operated more efficiently thanks to economies of scale. Consumers can also be divided into two main groups: small retailers, who mostly buy from local producers, and larger retailers, who also import mushrooms.
Domestic demand and supply were estimated with sophisticated statistical techniques and machine learning. According to these estimated, domestic demand in the UK market is:
Domestic supply is:
The world price is pw=400.
When writing the report, make sure that you specify your assumptions and use clear economic arguments to support your statements. Refer to theories and categories we learned but apply them specifically to the problems. Please use clear and concise language. You can choose the structure of your report, for example, you can write one unified report or answer each question separately. Answers building on a good coverage of different approaches, theories, and examples will attract high marks. You are free to include graphs or figures, but make sure to reference them if they are from an external source.