Government Intervention in Agriculture

1
GovernmentIntervention in Agriculture

• Chapter 12

2
Normal Rationale for Government Intervention

• Support/protect an infant industry
• Curb market powers of imperfect competitors to
  promote social good
• Provide for food security
• Provide for consumer health and safety
• Provide for environmental quality

3
Nature of Farm Problem

• Inelastic demand for raw agricultural products
• Increasing productivity leads to commodity
  surpluses and low prices
• Low income elasticity mutes any help from a
  strong general economy
• Strong dollar weakens export demand for farm
  products
• High asset fixity and interest sensitivity

4
Lets assume that the market equilibrium occurs
at point E1, which corresponds to a price of P1
and a quantity of Q1.
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Increasing supply causing movement along
demand curve from E1 to E2 will cause prices to
fall more than the increase quantity, or ?P gt
?Q. Stated another way, area 0P2E2Q2 is less
than area 0P1E1Q1.
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Lets start with an inelastic demand curve D1 and
equilibrium price P1.
E1
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E1
Movement along an inelastic demand curve
translates into a sharply lower price P3 at
equilibrium E3.
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A more elastic demand curve means
equilibrium would occur at E2 rather than E3.
This prevents a sharper drop in total farm
revenue given by demand curve D1.
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Forms of Government Intervention

• Adjusting production to market demand
• Price and income support payments
• Foreign trade enhancements
• Crop insurance
• Subsidized credit
• Other forms

10
Consumer Issues

• Adequate and cheap food supply
• Nutrition and health issues
• Food subsidy issues
• Rural community issues

11
Resource Issues

• Soil erosion and land use issues
• Adequacy of water supply issues
• Hired farm labor issues
• Energy issues

12
Resource Conservation and Related
Programs Affecting Agriculture
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13
International Issues

• Adequacy of world food supply

14
Note major differences between low, middle and
high income countries.
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International Issues

• Adequacy of world food supply
• Movement towards free trade