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Self-test Questions
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1The Common Agricultural Policy (CAP) accounts for about half of the EU's budget but it used to account for much more.
A)TRUE
B)FALSE


2The CAP was created in the 1990s in reaction to the Mad Cow crisis.
A)TRUE
B)FALSE


3Now only about 3% of the EU population works on farms, but when the CAP was set up this figure was much higher.
A)TRUE
B)FALSE


4In the early CAP, prices of food were keep high with tariffs alone since the EU was a net importer of food.
A)TRUE
B)FALSE


5Since the CAP typically keeps the price of food in the EU above world market levels, it can be thought of as a having the same effects as a tax on consumption and a subsidy to production.
A)TRUE
B)FALSE


6The main effects of a price support programme like the CAP are:
A)a rise in the quality of food produced.
B)an improvement in the environmental friendliness of farming methods.
C)an increase in farm incomes with most of the increase going to the largest, most productive farms.
D)an increase in food imports.


7The CAP was most recently reformed:
A)in 2003.
B)to reduce the cost of the CAP.
C)in 1992 as part of the Single European Act.
D)when the Euro was introduced.


8The distribution of farm sizes in the EU:
A)is very equal, most farms are fairly large.
B)is very unequal: ranking farms from large to small, the 7% largest farms account for about half the land, while the 50% smallest farms account for only 7% of that land.
C)is not an important consideration.
D)has been getting more even over time.


9One of the main effects of the MacSharry reforms was:
A)To increase the EU's production of food.
B)To make the CAP less costly to the EU budget.
C)To reduce the 'food mountains' that the EU had accumulated.
D)To make CAP payments to large and small farmers fairer .
Suppose the EU is a food importer and the CAP keeps food prices in the EU at the ‘Price Floor’ shown in the diagram using an import tariff while world food prices are <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077111192/117919/ch08q10eq02.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> as shown. Use the diagram to answer the questions; in particular refer to the labels in the diagram <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077111192/117919/ch08q10eq01.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (24.0K)</a>



10The exact same outcome in terms of output, imports, consumption, prices, government revenue and welfare could be achieved by imposing a sales tax equal to and a production subsidy equal to .


11Assume for simplicity that the world food price is unchanged by changes in EU policies; if the EU provided farmers with a production subsidy equal to T but allowed free trade in food, the domestic price would be ____, domestic consumption would be ____, domestic production would be _____ and imports would be ______.


12If the EU abandoned the price floor policy and allowed free trade in food (again assume no change in the world price), the domestic price would be <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077111192/117919/ch08q10eq02.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> consumption would be , production would be and imports would be ; this liberalisation would change producer surplus by , consumer surplus by and government revenue by . On the whole, the net gain would be .
Assume for simplicity that the world food price remains unaltered by changes in EU policies (i.e. it stays at <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077111192/117919/ch08q10eq02.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> regardless). Consider a situation in which the EU’s food supply curve is initially given by the curve marked Supply, but due to technological progress and investment encouraged by high and guaranteed prices, the supply curve shifts out to the curve marked Supply'. In answering the questions refer to the labels in the diagram. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077111192/117919/ch08q12eq01.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (25.0K)</a>



13Prior to the supply curve shift, the EU could enforce the price floor with a tariff equal to , while afterwards it can only enforce the price floor by buying a quantity of food equal to ; thus prior to the shift, enforcing the price floor made a contribution to the EU budget equal to while after the shift, the price floor cost the EU budget , assuming that the food the EU buys is not resold.


14Prior to the supply shift, the net welfare cost of the price floor was .


15After the supply shift, the welfare impact of the price floor compared to free trade is for EU consumers, for EU producers, and for EU taxpayers.


16If the EU sells the food it buys post-supply shift on the world market, the world price will and this will foreign food producers.





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