Chapter11 - Government Interventionin Agriculture Chapter11...

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Government Intervention in  Agriculture Chapter 11
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Topics of Discussion Defining the “Farm Problem” Forms of government intervention Consumer issues  Price and income support mechanism Phasing out of supply management Domestic demand expansion Importance of export demand
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The “Farm Problem” Inelastic demand and a bumper crop Lack of market power Interest sensitivity Trade sensitivity Asset fixity and excess capacity
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An increase in supply  causes price to fall  more sharply than the  quantity clearing the  market.
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If the demand curve is  more elastic (D 2 ), the  price will only fall to  price P 2  rather than P 3   for a given increase in  supply.
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Price and Income Support: A Historical perspective Commodity acquisition-loan rate  mechanism Set-aside mechanism Target price mechanism Commodities covered by  government programs
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The Commodity Credit  Corporation’s Loan Rate Approach to Supporting Farm Prices and Income
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Market Level Effects of Loan Rates Free market equilibrium occurs at point E.  Let’s assume that P F  is below a politically acceptable price, and that the price desired by policymakers is P G .
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Market Level Effects of Loan Rates The Commodity Credit Corporation of the USDA began in the Thirties to  acquire excess supply  at the desired price its through non- recourse loan provisions.   The goal was to shift demand  from D to D+CCC ACQ , pulling  up the price from P F  to P G Note that consumer demand actually  fell  from Q F  to Q D .
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Market Level Effects of Loan Rates The CCC stored the surplus  Q G -Q D  in metal bins at great expense to taxpayers.
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