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Price vs. Income Support

Price vs. Income Support. Price support – Production controls Income support – involves government support of farm income Income is supported but price is not supported. Price and Income Support (combined) (Basically raises price and thus also supports income). Purchase program

erica-king
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Price vs. Income Support

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  1. Price vs. Income Support • Price support – • Production controls • Income support – involves government support of farm income • Income is supported but price is not supported

  2. Price and Income Support (combined)(Basically raises price and thus also supports income) • Purchase program • Nonrecourse loan (CCC LR) • Production control (ARP)

  3. Government Purchase Program • Government stands willing to purchase • What happens in the market? • Will need to know • Where is support price relative to competitive equilibrium? • Impact on Quantity Supplied • Impact on Quantity Demanded by consumers • Quantity purchased by government • Does elasticity of supply and demand matter?

  4. Nonrecourse Loan • Why a loan? • Lowest Prices typically at harvest • Allows farmer to store and market • Farmer takes out loan from Commodity Credit Corporation (CCC) = loan rate (LR) * production • Repayment Options • Sell crop and repay loan plus interest • Forfeit crop (no recourse for forfeiture)

  5. Nonrecourse Loan Rate (Case #1) • Is it Price or Income Support? • Set below competitive equilibrium • Does it matter? • Why not? • Why? $ S P 1 LR D Q/yr q 1

  6. Nonrecourse Loan Rate (Case #2) • Set above competitive equilibrium • Does it matter? $ S LR P 1 D qd2 qp2 Q/yr q 1 CCC stocks

  7. Acreage Reduction ProgramNo Nonrecourse Loan S1 • What happens? • Any guess at why it isn’t drawn as a parallel shift? $ S0 P1 P0 D0 q1 q0 Q/yr

  8. Acreage Reduction ProgramWith Nonrecourse Loan #1 S1 • What happens? • Does the LR do anything? $ S0 P1 P0 = LR D0 qd1= qs1 qd0 qs0 Q/yr CCC Stocks0

  9. Acreage Reduction ProgramWith Nonrecourse Loan #2 S1 • What happens? • Does the LR do anything? $ S0 P1=P0 = LR D0 qd0 = qd1 qs1 qs0 Q/yr CCC Stocks0 CCC Stocks1

  10. Loan Rate with Export Demand • Set above competitive equilibrium in domestic market and above TD curve • Does it matter? $ S LR P1 TD DD qd2 q1 qp2 Q/yr CCC stocks

  11. Loan Rate with Export Demand #2 • Set above competitive equilibrium in domestic market and above ED curve • Does it matter? $ S LR TD D qdd qed qp Q/yr Domestic Demand Export Demand CCC stocks

  12. Loan Rate Below International Equilibrium • Set below competitive equilibrium • Does it matter? $ S P TD LR D qdd qp Q/yr Domestic Demand Export Demand

  13. Target Price (Case #1) • Is it Price or Income Support? • Set below competitive equilibrium • Does it matter? • Why not? • Why? $ S P 1 TP D Q/yr q 1

  14. Target Price (Case #2) • Set above competitive equilibrium • Does it matter? $ S TP Deficiency Payments P 1 MP D Qp2=Qd2 Q/yr q 1 No CCC stocks

  15. Target Price (Case #2a) • Another way to look at this • Supply curve vertical until above target price $ S TP Deficiency Payments MP D Qp2=Qd2 Q/yr No CCC stocks

  16. Target Price & Loan Rate (Case #1) • Both set above competitive equilibrium • Now what happens? $ S TP Deficiency Payments LR MP D Qd2 Qp2 Q/yr If loan rate wasn’t effective this Would be the market price CCC stocks

  17. Target Price & Loan Rate (Case #2) • Target price set above competitive equilibrium and loan rate below market price • Now what happens? $ S TP Deficiency Payments MP LR D Q/yr Qp2=Qd2 No CCC stocks

  18. Target Price & Loan Rate (Case #3) • Both set below competitive equilibrium • What are the impacts? $ S MP TP LR D Q/yr Qp2=Qd2 No CCC stocks

  19. Target Price and Loan Rate with Export Demand • Set above competitive equilibrium in domestic market and above ED curve • Does it matter? $ S TP Deficiency Payments MP LR TD DD qd2 qp2 Q/yr Domestic Demand International Demand No CCC stocks

  20. Question: How can we get price from current $2/bu to desired $3/bu? • What can you do? $ S MP = $2.00 TD DD Q/yr

  21. Question: How can we get price from current $2/bu to desired $3/bu? • What can you do? • Supply control S2 $ S MP = $2.00 TD DD Q/yr Qd2=Qp2 Qd1=Qp1

  22. Question: How can we get price from current $2/bu to desired $3/bu? • What can you do? • Supply control • Price support $ S LR = MP = $3.00 MP = $2.00 TD DD Qd1=Qp1 Q/yr qd2 qp2

  23. Question: How can we get price from current $2/bu to desired $3/bu? • What can you do? • Supply control • Price support • Export subsidy $ S MP = $3.00 MP = $2.00 TD2 TD DD Qd1=Qp1 Q/yr qdd2 qp2 International Demand

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