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c10competitive markets applications.qxd 7/15/10 4:58 PM Page 419

10.4 PRICE SUPPORTS IN THE AGRICULTURAL SECTOR 419

$20

Price (dollars per bushel) Support $10 F B G S

price
A
$8
$7
E C
$2
D
5 6 8 10
Quantity (billions of bushels per year)

With Acreage
With No Program Limitation Program Impact of Program
C onsumer surplus A + B + F F –A – B
($36 billion) ($25 billion) (– $11 billion)

Producer surplus C + E A + B + C + E + G A + B + G
($18 billion) ($32 billion) ($14 billion)

Impact on government budget zero –B –C–G –B–C–G
(−$4.5 billion) (–$4.5 billion)
Net benefits A + B + C + E + F A + E + F –B – C
(c onsumer surplus + producer surplus – ($54 billion) ($52.5 billion) ( –$1.5 billion)
g ov ernment expenditures)

Deadweight loss zero B + C ($1.5 billion)

FIGURE 10.13 Impact of an Acreage Limitation Program
The government could support a price of $10 per bushel by offering farmers cash for plant-
ing less acreage, reducing output to 5 billion bushels. With no acreage limitation program,
the sum of consumer and producer surplus is $54 billion, the maximum net benefit possible
in the market. The program decreases consumer surplus by $11 billion, increases producer
surplus by $14 billion, has a negative impact of $4.5 billion on the government budget, and
reduces the net benefit by $1.5 billion (the deadweight loss).

To maintain a price of $10 per bushel, the government could buy the extra 3 billion
bushels to eliminate the excess supply. When the government purchases are added to
the market demand (see the curve labeled D government purchases in Figure 10.14),
the equilibrium price will be $10 (at point W ). Under this government purchase pro-
gram, consumer surplus measured by the area under the original market demand
curve D will decrease by $11 billion and producer surplus will increase by $14 billion,