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Lecture #10 - -Support the price farmers receive for their...

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Lecture #10 Market Intervention by Government Redistributes Income -Government is often called upon to intervene in agricultural markets to alter the market price with the objective of “reducing poverty,” e.g.: -Supporting the price above its market clearing level to increase the revenue to low income farmers. -Set and enforce a price ceiling below the market clearing level in order to increase the purchasing power of consumers. -In either case, the government intervention transfers income from one group to the other and reduces the efficiency of resource allocation. -The welfare effects of the poverty can be measured by the changes in consumers’ and producers’ surplus. The deadline loss is a measure of the cost to society from allocating its resources less efficiently. “Cheap Food” Policy Objective -Contrast the welfare effects of alternative approaches:
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Unformatted text preview: -Support the price farmers receive for their products above equilibrium and then subsidize sale of the “surplus” on the domestic market.-Investment in productivity-enhancing, cost-reducing agricultural research. Distributional Impact of Investments in Agricultural Research-Investments in agricultural research benefit consumers in general by reducing the price of food and in turn their real cost of living.-This has a disproportionately positive (progressive) impact on low income consumers. Because they spend the largest fraction of their incomes on food, they enjoy the largest percentage reduction in their cost of living.-This can also benefit other sectors of the economy because consumers have more of their income available to spend of things other than food....
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