Bridging Micro- and Macro-Analyses of the EU Sugar Program: Methods and Insights

That is, if the out-of quota price is lower than the average total cost in the short run and the out-of-
quota price is greater than the average variable cost (a plausible case in C sugar producing regions),
then there is cross-subsidization driving the production of out-of-quota sugar.

Figure 1: A case of cross-subsidy between A&B and C sugar due to fixed costs

Kopp and de Gorter (2005) also point out another possible case of cross subsidization when the out-of-
quota price p₂ is lower than AVC and the in quota price p₁ is greater than ATC in y₁. In such a case,
there will be production of y2 if the costs saving due to returns to scale exceed the losses on the out-of
quota market

The analytical derivation of the optimal conditions is cumbersome, because of the discontinuity in the
supply response introduced by the quota regime. The maximization program is such that one cannot
assume that the equality between the marginal cost and the out-of-quota price drives production in a
general case. The level of quota must be large enough to ensure that the short run profit (profit less
fixed costs) is positive. Supply is then determined by the combination of two conditions: i/ that p2
equals marginal cost ; and ii/ that p1y1+p2y2-C(y1+y2,w,z)>0 (break even point).

The considerations above suggest that the coverage of fixed costs by the rent provided to the in-quota
production is a possible determinant of the supply of C sugar. This idea was central in the decision of

<<   4   5   6   7   8   9   10   >>

More intriguing information