The Bourgogne Valley in France is renowned for producing high -quality wine at a fraction of the cost of many other vineyards around the world. Bourgogne produces over 20 million bottles of wine annually, of which 5 million are exported to the US. Each bottle entering the US is subjected to a $.50 per bottle excise tax, which generates about $2.5 million in tax revenues. Frost patterns have caused unusually cold temperatures, devastating many of the wine producers in that region.
How will frost affect the price of French wine?
Assuming that frost does not impact the Bordeaux wine area, how will frost impact the market for Bordeaux wines?
Demand and Supply
The opportunity cost of producing wine, for the wine-producers from the Bourgogne Valley in France, is very low in comparison to the opportunity cost, which win-producers from the rest of the world face. It suggests that the resources are best allocated when investors in the Bourgogne valley of France invest in wine-industry/wine-production. As the cost of producing wine is less than the competitors, wine-producers from the Bourgogne Valley have a competitive advantage over the rivals. However, it is essential to understand that the demand in the wine market is very much influenced by preference. As there are many similar products on the market (close substitutes) and preference is a relevant economic factor, therefore, the demand curve of the market must be kinked.
If the frost adversely affects wine production in Bordeaux, it will shift the supply of French wine to the left, causing an increase in price and reduction in total output. If the demand is relatively elastic, then an increase in price will decrease both quantities demanded and revenue. However, if the demand for the wine is relatively inelastic (steep demand curve) the increase in price will have a small impact on the quantity demanded (small decrease) and large impact on revenue (increase in revenue and profit) (Mankiw).
From the provided information we know that the excise tax of $0.50 is levied upon each bottle of wine that is imported from France. When the size of import decreases, the revenue collected in the form of the excise tax of $0.50 per bottle will also decrease.
If frost does not impact or affect the Bordeaux area, then the supply will not change (there will be no shift in the supply curve to the left). The market price and output of the product will remain stable. As there will be no change/shift in the supply of wine from the Bordeaux area, the price and the quantity demanded will not change.
Work Cited
Mankiw, N Gregory. Principles of Microeconomics. 8. Cengage Learning, 2016.
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