Consumer surplus is a term used to refer to the amount less of what a consumer is willing to pay for a commodity that he will derive utility. Producer surplus refers to the price that the producer sells his product above the market price, this flow down to the owners of the factors used to produce the products, but in a purely competitive market, this ends up as economic rent consumer surplus is usually a triangle that is above the market equilibrium price but under the demand curve. Producer surplus is normally a triangle that is below the equilibrium price but above the demand curve because it is the minimum that the producers can produce that product.
The government can influence the consumer and producer surplus through taxes and subsidies. These are important measures of efficiency in welfare economics.
The introduction of trade policies to regulate the food products being exported from the developing countries had some effect on the consumer and producer surplus. These were meant to cut the health risk in transportation of the agricultural products through the use of non-tariff barriers of trade; these ensure that certain environmental, safety, and quality standards are met before the imports enter the domestic market. This assists in the control of the externalities that arise due to consumption of these food products, some of the set guidelines include the British retail consortium and the European Good Agricultural Practices (EurepGAP).
Some example cases involving the ban of products include the exporting of the Guatemalan raspberries that were being exported to the US and Canada due to the outbreak of cyclospora in 2001, the partial ban on Kenyan from exporting fish in the European Union due to health risks resulting from the outbreak of cholera on Lake Victoria in 2001, and the ban on Zambian fresh vegetable exports to the European market due to the high levels of maximum residue limits.
This regulation affects the production and the international markets and addresses the externalities in consumption, production, and distribution.
From the partial equilibrium, these regulations affect the consumer and producer surplus and the exporting country (Zambia, Guatemala, and Kenya) and importing country (US). The importing countries’ level of imports decreases, the domestic prices increase due to the cost of complying with the regulations; this increases the producer surplus through gaining rents while the consumer surplus reduces.
In an open economy, like the US, the cost of production reduces since the standards to control the imports are set, this leads to increased consumption of locally produced goods, and this leads to a shift in the supply curve due to the increased consumption of the locally consumed products as explained in the diagrams below. The price will increase; this is because of the increase in the compliance costs, which leads to a shift on the demand curve towards the left. The net welfare effect results in a decrease in the consumer surplus as the producer surplus increase.
Some of the consumer surplus lost by the consumers can be regained after they react to the changes that occurred due to the policies that have been put in place, they can get better goods that are imported since they meet certain set conditions. This can result in a shift in the demand towards the left; the export demands may arise since the producer surplus will not change but increases consumption, therefore, increasing the consumer surplus partially to compensate for the losses incurred during the trade.
These kinds of policies that regulate the imports are likely to be characterized with economic rents, supply shifts, demand shifts and determine the trade partners with who a country to trade with, this is because if a country fails to comply with the set standards, it can export its product to another country.
References
- Food safety measures and developing countries.
- Gregory Mankiw (2006) Principles of Macroeconomics, Academic Internet
- Publishers