Lecture Economics (19/e) - Chapter 19: Agriculture: Economics and policy

After reading this chapter, you should be able to: Explain why agricultural prices and farm income are unstable, discuss why there has been a huge employment exodus from agriculture to other U.S. industries over the past several decades, relate the rationale for farm subsidies and the economics and politics of price supports (price floors), describe major criticisms of the price-support system in agriculture, list the main elements of existing Federal farm policy.

Agriculture: Economics and Policy

• Extreme diversity

• Farm products and food products

• Short-run price and income instability

• Inelastic demand

• Fluctuations in output

• Fluctuation in demand

• Dependence on world markets

• Effects of changes in farm output on agricultural prices and income

D Q

P p

Q

0

P

P n

P b

Q Q

Normal Farm Income

n p

b

• The effects of a demand shift on

agricultural prices and income

D 1

P 1

Q

0

P

P 2

Q n

b

a

D 2

Shift in demand causes a large change in

price and farm income

• Supply increased rapidly

• Technological progress

• Demand increased slowly

• Inelastic with respect to income

• Population growth

• Long-run decline of agricultural prices

and farm income

D 1

P 1

Q

0

P

P 2

Q 1

b a

D 2

S 1 S

2

Q 2 c

• Major consequences

• Increased minimum efficient scale (MES)

• Consolidation

• Agribusiness

• Massive exit of workers

• Farm labor 2% of labor force

• Farm-household income

• Subsidized since 1930s

• Support for agricultural prices, income, and output

• Soil and water conservation

• Agricultural research

• Farm credit

• Crop insurance

• Subsidized sale of farm products in world markets

Economics of Farm Policy

• Rationale for farm subsidies

• Necessities of life

• “Family farm” institution

• Extraordinary hazards

• Competitive markets for output while inputs have significant

market power

• Agricultural Adjustment Act of 1931

established parity concept

• Particular real output results in

same real income

• Preserve purchasing power

• Rationale for price supports

Parity Ratio =Prices Received by Farmers

Prices Paid by Farmers

• Economics of price supports

• Effective price floor

• Generates surplus output

• Gain to farmers

• Loss to consumers

• Efficiency losses

• Other social losses

• Environmental costs

• International costs

b a

S

S

D

D

P e

P s

Tax Burden

Of Surplus

Economics of Farm Policy

Surplus

c

• Reduction of surpluses

• Restricting supply

• Acreage allotments

• Bolstering demand

• Gasohol

• Biodiesel

• Corn-based ethanol

• The ethanol program

• Higher food prices

• Secondary effects

• Criticisms of parity concept

• Criticisms of price supports

•Symptoms not causes

•Misguided subsidies

•Policy contradictions

• Public choice theory revisited

• Changing politics

• Declining political support

• World trade considerations

• Recent farm policy

• Freedom to Farm Act of 1996

• Food, Conservation, and Energy Act of 2008