Page 413 - Microeconomics, Fourth Edition

c10competitive markets applications.qxd 7/15/10 4:58 PM Page 387

1
reduced many of the program benefits. Historically, Congress has required the Department of Agriculture
to support the prices of about 20 commodities, including sugar (sugar cane and beets), cotton, rice, feed
grains (including corn, barley, oats, rye, and sorghum), peanuts, wheat, tobacco, milk, soybeans, and various
types of oil seeds (such as sunflower seeds, and mustard seeds). During the fiscal years between 1983 and
1992, government expenditures on agricultural programs like the ones described here were more than
$140 billion. The most recent farm bill, the Food, Conservation, and Energy Act of 2008, builds on earlier
legislation to provide an array of programs that support the prices of agricultural products and increase the
income of America’s farmers.
Price support programs can take many forms. For example, under “acreage limitation programs”
wheat or feed grain farmers agree to restrict the number of acres they plant. In exchange, the government
gives the farmers an option to sell their crops to the government at a guaranteed price. Farmers are not
required to sell their crops to the government and would not do so if the market price exceeds the guar-
anteed price. But a farmer will take the option to sell to the government if the market price is lower than
the guaranteed price. Further, because an acreage limitation program reduces the amount of the crop on
the market, the market price is higher than it otherwise would be.
Other programs have supported prices for other commodities. For example, the government has sup-
ported the price of peanuts by establishing “poundage quotas,” limiting the quantity of edible peanuts
that a farmer could sell. For many years domestic sugar producers have relied on restrictive import quotas
to raise sugar prices in the United States. The government has also supported tobacco prices by restricting
production to certain farms and by limiting the amounts that those farms could produce.
Since there are many small consumers and producers of agricultural commodities, agricultural markets are
often good examples of perfectly competitive markets. Absent price supports, the forces of supply and demand
would lead to a competitive equilibrium and an economically efficient allocation of agricultural resources.

CHAPTER PREVIEW After reading and studying this chapter, you will be able to:

• Analyze the consequences of many forms of government intervention in perfectly competitive markets,
including the impositions of excise taxes, subsidies to producers, price ceilings, price floors, production
quotas, and import tariffs and quotas.

• Explain how government intervention creates dead-
weight losses in perfectly competitive markets as
economic resources are reallocated.

• Show how intervention affects the distribution of
income and the net benefits to consumers and pro-
ducers, typically making some people better off
while leaving others worse off.
• Employ economic analysis to understand the forces
and issues underlying public policy discussions about
government intervention in many kinds of competi-
tive markets.
1
Some farm program benefits were restored or increased in a farm bill passed by Congress in 2002.
387