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301lec18 - Lecture 18 Econ 301 Professor Severinov...

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Lecture 18 Econ 301 Professor Severinov Government Regulation Competitive Markets
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Price Supports via Government Purchases Much of agricultural policy is based on a system of price supports Prices set by government above free-market level and maintained by governmental purchases of excess supply Government can also increase prices through restricting production, directly or through incentives to producers
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B D A To maintain a price P s the government buys quantity Q g . D + Q g Q g Price Support via Government Purchases Quantity Price S D P 0 Q 0 P s Q 2 Q 1 E A, B and D are a part of new producer surplus Consumer surplus loss is A+B Net Loss to society: government purchases E minus D.
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Welfare Effect of Price Support via Government Purchases Consumers Quantity demanded falls and quantity supplied increases Government buys surplus Consumers must pay higher price for the good Loss in consumer surplus equal to A+B
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Welfare Effect of Price Supports via Government Purchases Producers Gain since they are selling more at a higher price Producer surplus increases by A+B+D Government Cost of buying the surplus to government = (Q 2 -Q 1 )P S This cost is funded by taxes, so indirect cost on consumers The government may be able to recover a part of this cost by selling on the foreign market or reselling on the domestic market in the future when prices rise (drought year).
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Price Supports What are the impacts on consumers, producers and the federal budget?
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