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CWU ECON 101 - Chapter 28 Farm Policy

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Chapter 28 Farm PolicyChapter OutlineYou Are HereFarm Prices Since 1950Farm Price IndexesCorn and GasolineCorn and Gasoline Prices Relative to their 2000 levelPrice Variability as the Justification for Government InterventionPrice FloorsFarm Markets Without SubsidiesSlide 11Government Purchase of Excess GoodsGovernment Lowers the Price to ConsumersVariable FloorsWhat Would Happen Without Price FloorsHistory of Price Supports: Buying ProgramsHistory of Price Supports: Output RestrictionsChapter 28Farm PolicyCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin28-2Chapter 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 HISTORY28-3You Are Here28-4Farm 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.28-5Farm Price Indexes28-6Corn 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.28-7Corn and Gasoline PricesRelative to their 2000 level28-8Price 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.28-9Price Floors•A Price Floor (a price below which a commodity may not sell) is set to protect farmers from prices that go “too low.”28-10Farm Markets Without SubsidiesPSDQ/tP*Q*ACH•Value to the Consumer: •0ACQ*•Consumers Pay Producers: •0P*CQ*•The Variable Cost to Producers: •0HCQ*•Consumer Surplus: •P*AC•Producer Surplus: •HP*C028-11Price FloorsPSDQ/tP*Q*ACHGPrice FloorBPfloorQD•Value to the Consumer: •0ABQD•Consumers Pay Producers: •0PfloorBQD•The Variable Cost to Producers: •0HGQD•Consumer Surplus: •PfloorAB•Producer Surplus: •HPfloorBG•DWL•BCG028-12Government Purchase of Excess GoodsPSDQ/tPrice FloorP*Q*ABCEFHGIJPfloorQSQD•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•ECF028-13PSDQ/tPrice FloorP*Q*ABCEFHGIJPfloorQSQD•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•ECFGovernment Lowers the Price to Consumers028-14Variable 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.28-15What 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).28-16History 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”.)28-17History 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


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CWU ECON 101 - Chapter 28 Farm Policy

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