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Applied Economics
Cost-Benefit Analysis (440.632, Summer 2025)
Assignment #1
This problem set is an individual assignment worth 80 points, due July 1, 2025.
The United States is the fifth-largest sugar producer and fifth-largest consumer of sugar in the world. Since 1789, when Congress first enacted a tariff on imported sugar, the U.S. Government has offered a variety of trade protection programs for the sugar industry.
In 1977, the Food and Agriculture Act instituted a loan and repurchase program for sugar produced in the U.S. that has acted as a domestic price support system. Under this program, sugarcane and sugar beet producers can obtain a loan to produce sugar. At the end of the loan term, the producers can either turn over the sugar they produce as payment for the loan or sell their sugar on the market if the price is higher than the loan amount.
This program has effectively kept the domestic price of sugar in the U.S. above the world price, except in 1980 and 1981 when sugar prices were high. This price support system was expanded by the Food Security Act of 1985. The current national average loan rate is 19.75 cents per pound for raw sugar.
The 1990 Farm Bill kept this loan and repurchase program but also added a two-tiered tariff known as a Tariff Rate Quota (TRQ) system. Under the sugar TRQ, the “quota” establishes the amount of sugar that can enter the country from abroad at a low or zero tariff rate, called the “in-quota tariff.” This amount is designed to meet U.S. obligations to the World Trade Organization. Sugar imports above this quota are subject to a much higher “over-quota tariff.” The current in-quota tariff for sugar is equal to 0.663 cents per pound, but is generally waived for most countries. The current over-quota tariff is 15.36 cents per pound for raw sugar. (See https://www.ers.usda.gov/topics/crops/sugar-and-sweeteners/policy for more details.)
Several authors have suggested that the TRQ and the loan and repurchase program should be eliminated. (For this assignment, the Tariff Rate Quota and the loan and repurchase program will be referred to collectively as the “TRQ” below.) You will conduct a benefit-cost analysis of a policy to eliminate these price supports.
1. (20 points) Draw a conceptual model of the welfare impacts of removing the TRQ.
a. (3 points) Draw a set of linear, U.S. domestic supply and demand curves for raw sugar with price, in cents per pound on the vertical axis, and quantity, in thousands of short tons of raw sugar on the horizontal axis. Include that graph here, including the labeling that you will do for parts 1.a through 1.d.
b. (3 points) Assume that the international supply of raw sugar is perfectly elastic and that the world price for raw sugar, Pw, is constant at some price below the intersection of domestic supply and demand.
Label your graph with the quantity that would be produced domestically without the TRQ, QS *, and the amount that would be consumed domestically without the TRQ, QD *. How much raw sugar would be imported without the TRQ?
c. (3 points) Assume that the existence of the TRQ in the U.S. increases the price of imported raw sugar to a higher price, PUS, but that the now higher sugar price in the U.S. is still below the intersection of domestic supply and demand. However, the international supply of sugar is still perfectly elastic; it is just more expensive for the U.S. consumer. Label your graph with the quantity that would be produced domestically with the TRQ, QS,TRQ, and the amount that would be consumed domestically with the TRQ, QD,TRQ. How much raw sugar would be imported with the TRQ?
d. (3 points) Label the areas on your graph with letters (e.g., A, B, C, …), particularly the areas that change between part 1.b and 1.c. That is, make sure to label the areas that change with the TRQ compared to those without the TRQ. Indicate the areas of welfare loss associated with the TRQ.
e. (8 points) Suppose that Congress is considering a policy that would eliminate the TRQ. Complete the Benefit-Cost Analysis Tableau below with the appropriate areas you labeled in part 1.d. Note that you are not entering dollar figures here, only indicating which areas represent gains and losses.
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Benefits |
Net Benefits |
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Domestic Consumers |
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Domestic Producers |
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U.S. Government |
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Total Society |
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2. (20 points) Gather the data necessary to estimate the monetary impact of a policy affecting the sugar TRQ.
a. Go to the USDA’s Sugar and Sweeteners Yearbook Tables at http://www.ers.usda.gov/data-products/sugar-and-sweeteners-yearbook-tables.aspx and familiarize yourself with the webpage.
b. Create a data series to compare the annual U.S. price of raw sugar with the world price from 1973 to 2024.
i. Download the “World, U.S., and Mexican sugar and corn sweetener prices” spreadsheet.
ii. For the U.S. price, use “U.S. raw sugar nearby futures price, ICE Contract 16, monthly, quarterly, and by calendar and fiscal year, since 1960” table. Obtain the U.S. price for raw sugar for 1973-2024 from the “Fiscal” column of the spreadsheet
iii. For the world price, you will have to use two datasets to create a full price series for 1973 to 2020.
Combine the data from the “World raw sugar price, monthly, quarterly, and by calendar and fiscal year, 1960 to 2011, discontinued as of July 1, 2011” and the “World raw sugar nearby futures price, ICE Contract 11, monthly, quarterly, and by calendar and fiscal year, since 1989.” Use the annual price under the “Fiscal” column for both of these datasets. For 1990-2010, where the two datasets overlap, use the data from the “World raw sugar nearby futures price, ICE Contract 11” dataset.
c. (3 points) Make a time series from 1973 to 2024 with years on the horizontal axis and price, in cents per pound, on the vertical axis. Graph both the U.S. price of raw sugar and the world price of raw sugar on this graph. Include the data you used and the graph here.
d. (3 points) Calculate the ratio of the U.S. price to the world price. For the period from 1973 to 2020, when the TRQ was in effect, report the average ratio of the U.S. price of raw sugar to the world price.
e. (3 points) Report the U.S. price and the world price of raw sugar for the fiscal year 2024.
f. (9 points) Obtain data on the quantity of sugar sold in the U.S. From the USDA website, download the “U.S. and Mexico fiscal year sugar supply and use” spreadsheet. Use the “U.S. sugar: supply and use (including Puerto Rico), by fiscal year, short tons, raw value, since 2000/01” table. (Be careful to get the data set with quantity reported in short tons, not the one reporting quantity in metric tons.) Report the “Total production,” “Total imports,” and the sum of (“Total supply” minus “Beginning stocks”) for the 2024/25 fiscal year. All quantities should be 1,000 short tons.
g. (2 points) Redraw your graph from part 1, substituting the values you reported in parts 2.e and 2.f for the appropriate variables on your graph.
3. (20 points) Estimate the quantity of raw sugar that would have been produced domestically in 2024
and the total amount that would have been consumed domestically in 2024 if the TRQ had not been in place.
a. Obtain the article by Kennedy and Schmitz, “Production Response to Increased Imports: The Case of U.S. Sugar,” from the class site.
b. (2 points) Kennedy and Schmitz report a range from the literature for the U.S. own-price sugar supply elasticities and the demand elasticities. Report these two ranges given by Kennedy and Schmitz and the midpoint for each range.
c. (5 points) Using the midpoint of the demand elasticities you just reported in part 3.b, estimate a functionfor a linear demand curve. The technique for doing this was described in the third lecture for week 2 on the slides entitled “Specifying Linear Demand when we don’t know much.” Assume that this elasticity holds at the U.S. domestic price of sugar, PUS, in 2024 and the amount of sugar consumed domestically with the TRQ, QD,TRQ, in 2024; both of which you obtained in part 2. Report your equation here.
d. (3 points) Using this demand curve, estimate the quantity of sugar that would have been consumed domestically without the TRQ, assuming the U.S. price of sugar without the TRQ would have been the world price for raw sugar, Pw, in 2024.
e. (5 points) Using the midpoint of the supply elasticities you just reported in part 3.b, estimate a function for a linear supply curve. The technique is analogous to what you did in part 3.c, but you are working with the supply curve. Assume that this elasticity holds at the U.S. domestic price of sugar, PUS, in 2024 and the quantity of sugar produced domestically with the TRQ, QS,TRQ, in 2024. Report your equation here.
f. (3 points) Using this supply curve, estimate the quantity of sugar that would have been produced domestically without the TRQ, assuming the U.S. price of sugar without the TRQ would have been the world price for raw sugar, Pw, in 2024.
g. (2 points) Redraw your graph from part 1, substituting in all of the values that you calculated in parts 2 and 3.
4. (10 points) Calculate the welfare effects associated with removing the Sugar TRQ
a. Using the values obtained or estimated in parts 2 and 3, calculate the monetary value of domestic welfare effects that would occur if the sugar TRQ was eliminated. Pay careful attention to the units in your calculations. The price axis in your graph is in cents per pound. The quantity axis is in thousands of short tons. You will need to make some adjustments to get the value in dollars.
b. Complete the Benefit-Cost Analysis Tableau below with the dollar value of the welfare effect you
calculated in part 4.a. from a policy that would eliminate the TRQ. To make things easier to report, you may want to report the values in billions of dollars
Welfare Impact of Eliminating the TRQ (billions of dollars)
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Costs |
Benefits |
Net Benefits |
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Domestic Consumers |
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Domestic Producers |
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U.S. Government |
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Total Society |
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5. (10 points) Write a summary of the results of your welfare analysis associated with removing the Sugar TRQ and offer a brief commentary. Would this be an economically efficient action? Why do you say this? Who would likely support such an action, and who would likely oppose it? Are there reasons why this policy may or may not be a good idea? You will be graded on how well you interpret your analysis as an economist. Please make sure to refer to the calculations and values you developed in this analysis to support your answer.