Each year, about 9 billion bushels of corn are harvested in the United States. The average market price of corn is a little over $2 per bushel, but costs farmers about $3 per bushel. Tax payers make up the difference. Under the 2002 $190 billion, 10-year farm bill, American taxpayers will pay farmers $4 billion a year to grow even more corn, despite the fact that every year the United States is faced with a corn surplus. Growing surplus corn also has unmeasured environmental costs. The production of corn requires more nitrogen fertilizer and pesticides than any other agricultural crop. Runoff from these chemicals seeps down into the groundwater supply, and into rivers and streams. Ag chemicals have been blamed for a 12,000-square-mile dead zone in the Gulf of Mexico. Overproduction of corn also increases U.S. reliance on foreign oil.
To illustrate some of the cost in social welfare from agricultural price supports, assume the following market supply and demand conditions for corn:
QS = -5,000+ 5,000P (Market Supply)
QD = 10,000 - 2,500P (Market Demand)
Where Q is output in bushels of corn (in millions), and P is the market price per bushel.
A. Graph and calculate the equilibrium price/output solution. Use this graph to help you algebraically determine the amount of surplus production the government will be forced to buy if it imposes a support price of $2.50 per bushel.
B. Use this graph to help you algebraically determine the gain in producer surplus due to the support price program. Explain.

  • CreatedFebruary 13, 2015
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