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Chapter 27

Chapter 27. 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.

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Chapter 27

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  1. Chapter 27 Farm Policy

  2. 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

  3. Farm Prices Since 1950 • Raw food commodity prices have increased much more slowly than overall inflation. • From 1982 to 2002 overall inflation was 82%. • 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.

  4. Farm Price Indexes

  5. 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.

  6. 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.”

  7. Farm Markets Without Subsidies • Value to the Consumer: • 0ACQ* • Consumers Pay Producers: • 0P*CQ* • The Variable Cost to Producers: • 0HCQ* • Consumer Surplus: • P*AC • Producer Surplus: • HP*C P A S P* C H D 0 Q* Q/t

  8. Price Floors B Pfloor Price Floor G QD • Value to the Consumer: • 0ABQD • Consumers Pay • Producers: • 0PfloorBQD • The Variable Cost to • Producers: • 0HGQD • Consumer Surplus: • PfloorAB • Producer Surplus: • HPfloorBG • DWL • BCG P S A P* C H D 0 Q* Q/t

  9. Government Purchase of Excess Goods • Value to the Consumer: • 0ABQD • Consumers Pay Producers: • 0PfloorBQD • Government Pays Producers: • QDBEQs • The Variable Cost to • Producers: • 0HEQS • Consumer Surplus: • PfloorAB • Producer Surplus: • HPfloorE • DWL • ECF P S A B E Pfloor Price Floor I P* C G H F J D 0 Q* QS Q/t QD

  10. Government Lowers the Price to Consumers • Value to the Consumer: • 0AFQS • Consumers Pay Producers: • 0JFQS • Government Pays Producers: • JPfloorEF • The Variable Cost to • Producers: • 0HEQS • Consumer Surplus: • JAF • Producer Surplus: • HPfloorE • DWL • ECF P S A B E Pfloor Price Floor I P* C G H F J D Q/t Q* QS QD 0

  11. 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.

  12. 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).

  13. 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”.)

  14. 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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