Problem Statement:

The government of New Zealand is concerned about the declining competitiveness of its dairy industry in the global market. In 2019, the country’s dairy exports accounted for approximately 20% of its total exports, but the industry has been facing stiff competition from other major dairy-producing countries like the United States, Europe, and Australia.

Policy: To boost the competitiveness of its dairy industry, the New Zealand government decides to implement an export subsidy of 10% on all dairy exports. This means that for every ton of dairy products exported, the government will provide a subsidy of NZD 100 (approximately USD 65) to the exporter.

Numbers:

• New Zealand’s total dairy exports in 2019: 2 million tons
• Average price of dairy exports per ton: NZD 1,000 (approximately USD 650)
• Total export value: NZD 2 billion (approximately USD 1.3 billion)
• Export subsidy rate: 10%
• Total subsidy amount: NZD 200 million (approximately USD 130 million)

Short-Run Effects:

• Increase in dairy exports: With the subsidy, New Zealand’s dairy exporters will be able to sell their products at a lower price, making them more competitive in the global market. This is likely to lead to an increase in dairy exports, potentially by 5-10%.
• Increase in production: To meet the increased demand, dairy farmers and processors will need to increase production, which may lead to an increase in employment and output in the short run.

Long-Run Effects:

• Overproduction and inefficiency: The subsidy may encourage overproduction and inefficiency in the dairy industry, as farmers and processors may focus on producing more to take advantage of the subsidy rather than improving their productivity and efficiency.
• Dependence on government support: The industry may become too reliant on government support, which can create uncertainty and instability in the long run.

Assumptions in the Model:

• The subsidy will be fully passed on to consumers in the form of lower prices.
• The dairy industry is perfectly competitive, with many buyers and sellers.
• There are no other factors affecting the demand and supply of dairy products.

Pros:

• Boosts competitiveness: The subsidy helps New Zealand’s dairy industry become more competitive in the global market.
• Increases exports: The subsidy is likely to lead to an increase in dairy exports, which can contribute to the country’s economic growth.

Cons:

• Inefficient allocation of resources: The subsidy may lead to an inefficient allocation of resources, as farmers and processors may focus on producing more rather than improving productivity and efficiency.
• Trade tensions: The subsidy may lead to trade tensions with other countries, particularly those that also produce dairy products, as they may view the subsidy as an unfair trade practice.
• Costly: The subsidy is a costly policy for the government, which may divert funds away from other important areas such as education, healthcare, or infrastructure development.