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Government Intervention in Agriculture

Government Intervention in Agriculture. Chapter 11. Normal Rationale for Government Intervention. Support/protect an infant industry Curb market powers of imperfect competitors to promote social good Provide for food security Provide for consumer health and safety

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Government Intervention in Agriculture

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  1. GovernmentIntervention in Agriculture Chapter 11

  2. Normal Rationale for Government Intervention • Support/protect an infant industry • Curb market powers of imperfect competitors to promote social good • Provide for food security • Provide for consumer health and safety • Provide for environmental quality

  3. Nature of Farm Problem • Inelastic demand for raw agricultural products • Increasing productivity leads to commodity surpluses and low prices • Low income elasticity mutes any help from a strong general economy • Strong dollar weakens export demand for farm products • High asset fixity and interest sensitivity

  4. Let’s assume that the market equilibrium occurs at point E1, which corresponds to a price of P1 and a quantity of Q1. Page 248

  5. Increasing supply causing movement along demand curve from E1 to E2 will cause prices to fall more than the increase quantity, or % D P > % D Q. Stated another way, area 0P2E2Q2 is less than area 0P1E1Q1. Page 248

  6. Let’s start with an inelastic demand curve D1 and equilibrium price P1. E1 Page 248

  7. E1 Movement along an inelastic demand curve translates into a sharply lower price P3 at equilibrium E3. Page 248

  8. A more elastic demand curve means equilibrium would occur at E2 rather than E3. This prevents a sharper drop in total farm revenue given by demand curve D1. Page 248

  9. Forms of Government Intervention • Adjusting production to market demand • Price and income support payments • Foreign trade enhancements • Crop insurance • Subsidized credit • Other forms

  10. Consumer Issues • Adequate and cheap food supply • Nutrition and health issues • Food subsidy issues • Rural community issues

  11. Resource Issues • Soil erosion and land use issues • Adequacy of water supply issues • Hired farm labor issues • Energy issues

  12. Resource Conservation and Related Programs Affecting Agriculture

  13. International Issues • Adequacy of world food supply

  14. Note major differences between low, middle and high income countries…. Page 289

  15. International Issues • Adequacy of world food supply • Movement towards free trade

  16. D=CCC S D 6 5 4 3 E 2 1

  17. SMKT S D 7 PG 6 5 PF 4 3 E 2 1

  18. Target Price 4.00 Market price 3.00 2.50 Loan Rate Qm

  19. Target Price 4.00 3.00 2.50 Loan Rate 2.00 Market price Qm

  20. S E 5 4 3 2 TD 1 QDD QTD

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