Chapter 11 Review - 1 Chapter 11 Government Intervention in...

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1 Chapter 11: Government Intervention in Agriculture LEARNING OBJECTIVES Understand the rationale underlying the federal government's intervention in agriculture. Discuss the features that often result in hard economic times in the agricultural economy. Understand tools the government can use to modify free market outcomes associated with the production and marketing of specific crops and livestock. Outline the major consumer, resource and international issues that confront agriculture and require government intervention. CHAPTER SUMMARY The purpose of this chapter was to illustrate the economic consequences of the inelastic nature of the demand for farm products and the continuing expansion of the farm business sector's capacity to produce, and to discuss the government programs that have been used to affect the market price farmers receive for their products. The major points made in this chapter may be summarized as follows: 1. Changes in supply, coupled with the highly inelastic demand for raw food and fiber products, can translate into periods of booms and busts in farm income. The ever-expanding nature of annual farm output helps explain the low returns to resources observed historically in agriculture. 2. A short-run price elasticity of demand of -0.20 suggests a price flexibility (the reciprocal of the price elasticity) of -5.00. For farmers, this means that a 1% increase in the quantity they send to market will lower the market price they receive during the year by 5%, all other things constant. 3. One approach to dealing with the historical problem of low returns to resources is the implementation of commodity supply programs, based upon federal policy mechanisms as nonrecourse loans, set-aside requirements, target prices and deficiency payments, and the Conservation Reserve Program.
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