Governments often provide agricultural subsidies to help agricultural producers manage the variations in agricultural production and profitability
Question:
Governments often provide agricultural subsidies to help agricultural producers manage the variations in agricultural production and profitability from year to year. For example, the government guarantees farmers a certain price (or target price) for their crops. When the market price falls below the target price set by the government, the government will pay eligible farmers a subsidy equal to the difference between the market price of the crop and the target price. The following graph shows the supply and demand curves for corn in a competitive market for this product. In the absence of any government subsidies, the equilibrium market price of corn is $5 per bushel. At that price, farmers produce Q1 bushels of corn per year because that is the level of output at which price equals their marginal cost. The target price is $6 per bushel. Discuss how the farm subsidy program results in more than the efficient output of the subsidized grains when the target price is above the market equilibrium price and an inefficiency cost is created.
Managerial Economics and Strategy
ISBN: 978-0321566447
1st edition
Authors: Jeffrey M. Perloff, James A. Brander