Japan has a total ban on imports of
foreign rice. Japanese rice consumption is
completely dependent on domestic production. The Japanese government claims that
this policy protects national security.
Assume that Japanese domestic consumption of
rice is 1 billion pounds per year and that the current price of rice is
$2 per pound.
Further assume that the world price of rice is $ 0.25 per pound
(delivered to Japan). It
is estimated that the price elasticity of demand for rice in Japan is
–1.0 while the
domestic price elasticity of supply in Japan is 0.5. Suppose that years of international
pressure and trade negotiations lead the Japanese to open their rice
market to foreign
producers of rice. Given the
volume of rice production in the world, assume that now
the Japanese can buy all of the rice that they want at $0.25 per pound
(i.e. the world
supply of rice to Japan is perfectly elastic). What will happen to the rice market in
Japan? Specifically:
- What
is the free trade level of rice consumption in Japan?
- How
much rice do domestic farmers produce in Japan?
- How
much rice is imported into the Japanese rice market?