Lecture Issues in economics today - Chapter 32

Chapter 32
Farm Policy

 

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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

 

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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.
 

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P r ic e In d e x ( 1 9 8 2 = 1 0 0 )

Farm Price Inde
1982=100

180
160
140
120
100
80
60
40

20
1950
1955
1960
1965
1970
1975
1980
1985
1990
Year

 

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Corn
Beef
hog

Soybea
Milk
CPI

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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.
 

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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.”

 

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Farm Markets Without Subsidies
P

•

S

A

•
•

P*

•

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

D
 

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Q*

 

Q/t
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Price Floors
P

S

A

Pfloor

•

Value to the Consumer:
• 0ABQD

•

Consumers Pay Producers:
• OPfloorBQD

•

The Variable Cost to Producers:
• OHGQD

•

Consumer Surplus:
• PfloorAB

•

Producer Surplus:
• HPfloorBG

•

DWL
• BEC

B

Price Floor

P*

C
G

H

D
 

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QD Q*

 

Q/t

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Government Purchase of
Excess Goods
P

S

A
B

Pfloor
P*

E

I

•

Consumers Pay Producers:
• OPfloorBQD

•

Government Pays Producers:
• QDBEQs

•

The Variable Cost to Producers:
• OHEQS

•

Consumer Surplus:
• PfloorAB

•

Producer Surplus:
• HPfloorE

•

DWL
• ECF

C

H
F

J

 

Value to the Consumer:
• OABQD

Price Floor

G

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•

D
QD Q*

QS

 

Q/t

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P

Government Lowers the Price
to Consumers
• Value to the Consumer:
A
B

Pfloor
P*

• OAFQS

S
E

•

Consumers Pay Producers:
• OJFQS

•

Government Pays Producers:
• JPfloorEF

•

The Variable Cost to Producers:
• OHEQS

•

Consumer Surplus:
• JAF
Producer Surplus:
• HPfloorE

Price Floor
I

C
G

H

•

F

J

 

D
QD Q*

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QS

•

 

Q/t

DWL
• ECF

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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.

 

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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).

 

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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”.)

 

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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.
 

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