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Lecture Issues in economics today - Chapter 32: Farm policy

After completing this unit, you should be able to: Conclude that economists generally are not in favor of price supports in agriculture; conclude that price variation is the leading economic justification for farm price supports, while also concluding that this is insufficient justification for most economists; apply supply and demand and consumer and producer surplus analysis to demonstrate economists’ reasoning in opposing farm price supports; describe and illustrate the mechanisms that are typically used to enforce price supports, and you will know some of their history. | Chapter 32 Farm Policy Chapter Outline FARM PRICES SINCE 1950 PRICE VARIATION AS A JUSTIFICATION FOR GOVERNMENT INTERVENTION CONSUMER AND PRODUCER SURPLUS ANALYSIS OF PRICE FLOORS PRICE SUPPORT MECHANISMS AND THEIR HISTORY Farm Prices Since 1950 Raw food commodity prices have increased much more slowly than overall inflation. From 1982 to 1998 overall inflation was 68%. Most food commodities cost less in 2000 than in 1982 in nominal terms (40% less in real terms.) Hog prices in 2000 yielded less than 40% of their 1982 levels. Price Variability as the Justification for Government Intervention Argument for intervention on this ground Highly variable prices create an unstable income for farmers reducing their interest in farming. Argument against intervention on this ground Using options markets and crop insurance farmers can dampen the impact of this variability. Price Floors A Price Floor (a price below which a commodity may not sell) is set to protect farmers from prices that go “too low.” Farm Markets Without Subsidies P S D Q/t P* Q* A C H Value to the Consumer: 0ACQ* Consumers Pay Producers: OP*CQ* The Variable Cost to Producers: OHCQ* Consumer Surplus: P*AC Producer Surplus: HP*C Price Floors P S D Q/t P* Q* A C H G Price Floor B Pfloor QD Value to the Consumer: 0ABQD Consumers Pay Producers: OPfloorBQD The Variable Cost to Producers: OHGQD Consumer Surplus: PfloorAB Producer Surplus: HPfloorBG DWL BEC Government Purchase of Excess Goods P S D Q/t Price Floor P* Q* A B C E F H G I J Pfloor QS QD Value to the Consumer: OABQD Consumers Pay Producers: OPfloorBQD Government Pays Producers: QDBEQs The Variable Cost to Producers: OHEQS Consumer Surplus: PfloorAB Producer Surplus: HPfloorE DWL ECF P S D Q/t Price Floor P* Q* A B C E F H G I J Pfloor QS QD Value to the Consumer: OAFQS Consumers Pay Producers: OJFQS Government Pays Producers: JPfloorEF The Variable Cost to Producers: OHEQS Consumer Surplus: JAF Producer Surplus: HPfloorE DWL ECF Government Lowers the Price to Consumers Variable Floors The Eau Claire Rule: the wholesale price floor on milk is set as a function of the distance between a given community and Eau Claire, Wisconsin. This subsidizes milk production on the coasts of the United States. What Would Happen Without Price Floors Prices would fall. Production would fall. Farmers would leave the industry until the price of commodities reached a level consistent with zero economic profit (normal profit). History of Price Supports: Buying programs Began in the 1930s. Reached a peak in the 1980s. The federal government purchased vast quantities of corn, soybeans, milk to be stored. The milk was powdered or turned into blocks of American Cheese. The cheese given away to the poor in the 1982 recession (which was the origin of the phrase “government cheese”.) History of Price Supports: Output Restrictions The buying programs were ended in the 1980s and were replaced with programs where the government offered higher prices for limited production. The programs purchased dairy herds and slaughtered them. Ordered grain farmers to set aside plots if they wanted the subsidized price.