Post on 21-Dec-2015
transcript
Chapter 28Farm Policy
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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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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You Are Here
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Farm Prices Since 1950
• Raw food commodity prices have increased much more slowly than overall inflation.
• From 1982 to 2008 overall inflation was 101%.
• Most food commodities cost less in 2008 than in 1982 in nominal terms (50% less in real terms.)
• Hog prices in 2000 yielded less than 45% of their 1982 levels.
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Farm Price Indexes
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Corn and Gasoline
• Corn is the main ingredient in ethanol.
• E85 (available mostly in the Midwest) is a substitute for gasoline.
• Recent spikes in gasoline prices have motivated increased corn planting.
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Corn and Gasoline PricesRelative to their 2000 level
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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
D
Q/t
P*
Q*
A
C
H
• Value to the Consumer: • 0ACQ*
• Consumers Pay Producers: • 0P*CQ*
• The Variable Cost to Producers: • 0HCQ*
• Consumer Surplus: • P*AC
• Producer Surplus: • HP*C
0
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Price Floors
P S
D
Q/t
P*
Q*
A
C
H
G
Price Floor
BPfloor
QD
• Value to the Consumer:
• 0ABQD
• Consumers Pay
Producers:
• 0PfloorBQD
• The Variable Cost to
Producers:
• 0HGQD
• Consumer Surplus:
• PfloorAB
• Producer Surplus:
• HPfloorBG
• DWL• BCG0
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Government Purchase of Excess Goods
P S
D
Q/t
Price Floor
P*
Q*
A
B
C
E
F
H
G
I
J
Pfloor
QSQD
• 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
• ECF0
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P S
D
Q/t
Price Floor
P*
Q*
A
B
C
E
F
H
G
I
J
Pfloor
QSQD
• 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
Government Lowers the Price to Consumers
0
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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.