Kestrel Valley Tomatoes: A Heatwave, Elasticities and a Price Ceiling

Before the heatwave. At $8, quantity demanded is 50,000 kg and quantity supplied is 50,000 kg. At $10 there is a surplus (45,000 demanded, 70,000 supplied), and at $6 a shortage (55,000 demanded, 30,000 supplied), so the market clears at $8 per kg and 50,000 kg.

After the heatwave. Supply falls 25,000 kg at each price: $6 gives 5,000; $8 gives 25,000; $10 gives 45,000. At $10, demand is 45,000 kg, so the new equilibrium is $10 per kg and 45,000 kg. Price rises 25% while quantity traded falls 10%.

PED (midpoint). % change in quantity = (45,000 − 50,000) ÷ 47,500 = −10.5%. % change in price = (10 − 8) ÷ 9 = +22.2%. PED = −10.5 ÷ 22.2 = −0.47. Demand is price inelastic over this range: buyers cut purchases proportionally far less than the price rise, which is plausible for a food item with few close short-run substitutes that takes a modest share of most budgets.

PES (before the shock), between $8 and $10. Quantity supplied rises from 50,000 to 70,000: % change = 20,000 ÷ 60,000 = 33.3%; % change in price = 22.2%. PES = +1.5. Supply is relatively price elastic, because the season's planting can be expanded and many small growers can bring marginal land into use.

Interpretation points. Elasticities are range-specific and refer to the demand curve, which has not shifted. Also, with a fixed harvest in the very short run, supply is effectively perfectly inelastic; the 1.5 figure describes the response over a full season, which matters for judging whether the price rise will call forth extra output.

Growers' revenue. Total revenue before = $8 × 50,000 = $400,000 per week; after = $10 × 45,000 = $450,000 per week, a rise of 12.5%. This follows directly from inelastic demand: when |PED| < 1, a price rise increases total revenue because the price effect outweighs the quantity effect. The result must be qualified: growers whose crop was destroyed lose heavily, and the gain accrues to those who still have tomatoes to sell. Market revenue is not the same as the industry's profit, since costs per surviving kilogram are unchanged but output is lower.

Consumers. They pay more and buy less. Assuming a linear demand curve, consumer surplus falls by roughly the rectangle (2 × 45,000) plus the triangle (0.5 × 2 × 5,000), about $95,000 per week. Low-income households are hit hardest in welfare terms because vegetables take a larger share of their budget, even if their absolute loss is similar.

Allocative efficiency. Before the shock the market was at equilibrium, so marginal benefit equalled marginal cost and total surplus was maximised (assuming no externalities). After the shock the new equilibrium still clears the market: the higher price rations a genuinely smaller crop to the buyers who value it most and signals growers and importers to supply more. The welfare loss comes from the harvest failure, not from the price mechanism, so there is no deadweight loss created by the price rise itself. Deadweight loss would appear only if a policy prevented the price from adjusting or if market power suppressed output.

Strong answers separate the distribution of surplus (who gains and loses) from the size of surplus (efficiency), and note that a competitive market with many growers and buyers gives little reason to expect price manipulation.

Effect of the ceiling. At $8 after the heatwave, quantity demanded is 50,000 kg but quantity supplied is only 25,000 kg, so a binding ceiling creates a shortage of 25,000 kg per week. The ceiling does not create any tomatoes; it only changes who gets them. Rationing shifts to queues, favouritism, first-come-first-served or black markets at prices above $10, and quality may deteriorate as growers sell ungraded produce. Because supply is fixed by the harvest in the short run, a ceiling cannot raise quantity supplied at all.

Who gains and who loses. Buyers who obtain tomatoes at $8 gain, but those who cannot find them lose, and low-income households with inflexible working hours may be least able to queue. Growers receive less per kilogram and may harvest less, sell to other regions, or cut plantings next season, so the longer-run supply response (PES around 1.5) works against consumers. Small retailers lose margin.

Is there a market failure to correct? The market is competitive with many growers and buyers, so the price rise reflects real scarcity rather than market power. There is therefore no efficiency case for a ceiling, only a distributional one. A ceiling below equilibrium also generates deadweight loss.

Better alternatives. Targeted income support or vegetable vouchers protect low-income households while preserving the rationing and signalling functions of price; temporary removal of tariffs on imports, support for cold storage, and competition monitoring address supply. If profiteering were documented, price-gouging rules targeted at identified conduct would be preferable to a blanket cap.

Judgement. The ceiling at $8 is politically attractive and would visibly lower the shelf price, but it converts a 10% fall in quantity into a 50% shortage and risks a smaller crop next season. Unless evidence of market power exists, the recommendation should be to allow the market to settle near $10 and use targeted transfers, with monitoring for abuse. A good answer acknowledges the short-run political pressure and states the conditions under which a temporary, softer ceiling combined with imports might be defensible.