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420 CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS

$20

Price (dollars per bushel) Support $10 F B G W D + government

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

With Government
With No Program Purchase Program Impact of Program
C onsumer surplus A + B + F F ($25 billion) –A – B
($36 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 – H – –B – C – G – H –
I – J ( – $30 billion) I – J ( –$30 billion)

Net benefits A + B + C + E + F A + E + F – H – I – J –B – C – H – I – J
(c onsumer surplus + producer ($54 billion) ($27 billion) ( –$27 billion)
surplus – g ov ernment expenditures)
Deadweight loss zero B + C + H + I + J
($27 billion)

FIGURE 10.14 Impact of a Government Purchase Program
The government could support a price of $10 per bushel with a government purchase pro-
gram, buying up the excess supply of 3 billion bushels. With no program, the sum of con-
sumer 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 $30 billion on the government budget, and reduces the net
benefit by $27 billion (the deadweight loss).

both the same as with the acreage limitation program discussed in the previous section.
Government expenditures, however, will be much greater than the $4.5 billion with
the acreage limitation program—$30 billion (3 billion bushels $10 per bushel
areas B C G H I J). This means that the net economic benefit will be
much smaller ($27 billion, versus $52.5 billion with the acreage limitation program)