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418 CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS
In this section we discuss two price support programs that have been used
in the agricultural sector: acreage limitation programs and government purchase
programs.

ACREAGE LIMITATION PROGRAMS

With an acreage limitation program, the government gives farmers an incentive to
hold production below the free-market level by paying them not to plant. Figure 10.13
illustrates how such a program works, using supply and demand curves similar to
those in Figure 10.1. (We have labeled the horizontal axis in billions of bushels be-
cause agricultural support programs often involve billions of dollars instead of mil-
lions of dollars.) In equilibrium, the price is $8 per bushel, and farmers produce 6 bil-
lion bushels per year.
Suppose the government wants to support a price of $10 per bushel. Instead of
imposing a quota, it provides farmers with an incentive to reduce output to 5 billion
bushels, the level that would lead consumers to pay a price of $10. At a price of $10,
farmers would like to produce 8 billion bushels, which would create an excess supply
of 3 billion bushels. They would be willing to restrict production to 5 billion bushels
only if the government compensates them for not producing this additional 3 billion
bushels. The compensation farmers will require is equal to the producer surplus they
will forgo if they limit production to 5 billion bushels. This amount is equal to areas
B C G in Figure 10.13, or $4.5 billion.
The program decreases consumer surplus by $11 billion (areas A B) and in-
creases producer surplus by $14 billion (areas A B G). It costs the government
$4.5 billion (areas B C G). The net benefit to society is the sum of consumer sur-
plus ($25 billion) and producer surplus ($32 billion), less the cost to the government
($4.5 billion), or $52.5 billion. The deadweight loss is $1.5 billion (areas B C).
Since the program introduces a deadweight loss, one might ask why the govern-
ment does not simply give farmers a cash transfer equal to their $14 billion producer
surplus gain under the acreage limitation program and then let the market function
without intervention to produce 6 billion bushels at a price of $8. This might seem
attractive because the deadweight loss would then be zero. The government would
collect the money to pay for the program from taxes imposed elsewhere. Although
such a program would be efficient, the public may find it more palatable to pay
farmers $4.5 billion to reduce output (and forgo a profit opportunity) than to give
farmers $14 billion to do nothing at all. 14

GOVERNMENT PURCHASE PROGRAMS
As an alternative to an acreage limitation program, the government can support a
price of $10 per bushel with a government purchase program. Figure 10.14 illustrates
how such a program might work still using the same supply and demand curves as in
Figure 10.13. At a price of $10 per bushel, farmers would like to produce 8 billion
bushels, but the market demand would be only 5 billion bushels. Thus, there would
be an excess supply of 3 billion bushels.

14 Of course, we must recognize that the government might create deadweight losses in other markets if it
imposed taxes to raise $14 billion to pay for the acreage limitation program.