South-Western College Publishing - Economics  
Tortilla Troubles
Subject Market Interference, Price Ceilings and Subsidies
Topic Government and the Economy
Key Words Subsidies, Price Controls, Price, Official Price, Minimum Wage, Poverty
News Story

The Mexican government has proposed that most subsidies on corn tortillas should end. In addition, the intention is to remove price controls. The effect on prices is uncertain, but hand-made tortillas from premium corn cost several times the official price. Instead of these subsidies, the government intends to give direct aid to the poor.

Mexicans are concerned because tortillas are a staple of their diet. Hitherto, tortillas have been cheap, helping the poor to obtain nourishment. But, in the future, with higher prices and a minimum wage of $3 a day, it will be difficult. Indeed, most families earn less than $10 a day, and one-half live in poverty. Further, a respected economist is skeptical whether the government will save much money

In contrast, the tortilla corn-flour producers are in favor of the plan. One industrialist commented that the subsidy was inefficient and expensive because it benefited everyone.

(Updated February 1, 1999)

1. a) Draw a diagram of the market for tortillas, showing the supply curve including a subsidy, and demand curve. Add an effective price ceiling and mark the price and quantity.
  b) If the price ceiling is removed, what will happen to the price and quantity? Illustrate on your diagram.
  c) If the subsidy is removed, how will the price and quantity change further? Again, illustrate on your diagram.
  d) Explain why many Mexicans are upset at the proposed changes. On your diagram, show the change in the amount of money that they would spend on tortillas.
  e) Why are producers pleased with the proposed changes in (b) and (c)? Which one would they likely approve of more? Why?
2. a) Draw another diagram showing the initial price-quantity combination and the equilibrium after the proposed changes have been implemented. Shade in the area of subsidy that the government no longer pays after the changes.
  b) If the government gives money to poor Mexicans to buy tortillas, which curve will be affected? What will happen to the equilibrium price and quantity of tortillas? Illustrate on your diagram.
  c) Assuming that the government funds the extra quantity traded, shade in the area representing its new expenditures on subsidizing the poor.
  d) There is a debate about whether any saving will result for the government. On what does the net change in government spending depend?
  e) Why might producers like the consumer subsidy aspect of the new plan?
Source Adolfo Garza, "End of tortilla subsidies would cost Mexicans", Cincinnati Enquirier, November 22, 1998.

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