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Chapter 32

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.

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Chapter 32

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  1. Chapter 32 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 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.

  4. 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.

  5. 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.”

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

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

  8. P S A B E Pfloor Price Floor I P* C G H F J D Q* QS Q/t QD Government Purchase of Excess Goods • 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

  9. Government Lowers the Price to Consumers P S A B E Pfloor Price Floor I P* C G H F J D Q* QS Q/t 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

  10. 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.

  11. 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).

  12. 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”.)

  13. 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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