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The impact of farm support programs to the economy

Consider the two attached case studies and answer the following questions"

Farm Subsidies

1. "Subsidizing the price of milk or other agricultural products is not very expensive considering how many consumers there are in the United States. Therefore there is little harmful effect from such subsidies." Evaluate this statement.
2. Subsidy programs are likely to have a number of secondary effects in addition to the direct effect on airy prices. What impact do you suppose farm subsidies are likely to have on the following:
a. Housing prices
b. Technological change in the dairy industry
c. The price of dairy product substitutes

Campaign Finance Reform

1. The motivation behind campaign finance reform was to limit the influence of special interests. In what sense could that legislation have the opposite effect?


Solution Preview

On question: the harmful effect on the subsidy. You should argue on the harmful effect to the economy at large. Use the idea of consumer surplus, producer surplus and deadweight loss. From the graph, the triangle above the price of $2.50 is the consumer surplus after subsidy/price floor. It is smaller than before price floor, ie the triangle above $1.50. Therefore consumers are worse off than before.

Who benefited from that? Some go to producers/farmers, ie the rectangle between $1.50 and ...

Solution Summary

Farm subsidy is a welfare loss. Farmers are not getting maximum benefit and consumers have to pay more. Resources are not efficiently allocated in the economy. The country is also not able to gain from trade.