Flooding in the Queensland Granite Belt destroyed thousands of hectares of grapevines?

Question

Flooding in the Queensland Granite Belt destroyed thousands of hectares of grapevines.

a) Vineyard owners whose vines were destroyed by the floods were much worse off, but those whose vines were not destroyed benefited from the floods. Why?

b) What information would you need about the market for wine in order to asses whether vineyard owners as a group were hurt or helped by the floods?

Answer 1

a) Vineyard owners whose vines were destroyed by the floods were much worse off, but those whose vines were not destroyed benefited from the floods. Why?

A sizable number of vineyards got destroyed, and hence the supply of grapes got reduced. An exogenous reduction of grape supply will cause the price of grapes to rise. The owners who kept their vineyard will benefit therefore from higher prices.

b) What information would you need about the market for wine in order to asses whether vineyard owners as a group were hurt or helped by the floods?

It depends on how open the wine market is to exports: If the market is many a domestic one, it is possible that the owners of destoyed vineyards suffer (but may be in part compensated by insurance and/or the government) while the owners of surviving vineyards benefit from higher prices. Hence, in the absence of exports, vineyard owners as a group could benefit (will be helped by the floods).

If the wine market is open to exports, owners of surviving vineyards won't be able to raise prices because of the international competition. Since they are not better off, while the owners of destroyed vineyards are worse off, owners as a group will be hurt.