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22 -- Part 11: Behavioral Economics and Modern
The historical representation of farmers in Congress strengthens the bias in favor of farm programs.
The importance of agriculture has been reflected in the U.S. political system.
All states have equal representation in the Senate.
Representation in the House of Representatives is based on a state's population.
Since farm states have smaller populations than urban states, farmers have more political power than non farmers.
The political structure plays an important role in making the farm states voter swing states in national elections and explains why farmers can lobby effectively for strong support packages.
Farmers' strong political representation in Congress establishes a core of law.
A core of the countryside filled with farms is established by individuals like in Congress.
People who favor price supports.
There are four price support options.
We will try to understand which options have the best chance of being implemented and why.
The downward pressure on price can be offset by the government.
Regulators are using regulatory force.
Economic incentives to 1.
Legal and regulatory force is being used to prevent anyone from selling or buying.
The sale of goods is subsidized.
Incentives to reduce the supply will eliminate the 4.
The downward pressure on price is caused by buying up and storing.
Consumers have to pay a low price for the good because suppliers get a high price.
Buying up and storing, giving away, or destroying enough of the good so that the total demand increases enough to eliminate downward pressure on price.
The costs and benefits are distributed in slightly different ways.
Let's look at each in detail.
If the government passes a law that says the price of wheat will be at least $5 per bushel, the price of wheat will go up.
No one will sell wheat at a lower price.
The law has no effect if the competitive equilibrium price is over $5.
Suppliers can't sell wheat at a lower price if the competitive equilibrium is below the price floor.
Some suppliers are helped by the price floor.
Suppliers who sell their wheat benefit.
Suppliers who can't find buyers are hurt.
How many suppliers will be helped and how many will be hurt depends on supply and demand.
The hurt group is relatively small when supply and demand are inelas tic because a large change in price brings about a small change in quantity supplied.
The hurt group is larger when the supply and demand are elastic.
The law may or may not specify who will be allowed to sell, but it must establish a non economic method of ration.
If it doesn't, buyers are likely to use nonprice rationing to buy from their friends.
Suppliers will have limited demand if individual farmers have a surplus.
Farmers who sell below the legal price will be arrested by the government.
If the number of producers is large, such a regulatory approach is likely to break down quickly since individual incentives to sell illegally are great and the costs of enforcing the law are high.
It's useful to understand who benefits and who's hurt by price floors by looking at the farmers who were producing before the law went into effect and the farmers who entered the market afterwards.
One way to limit the quantity is to forbid new farmers from entering the market.
The people who were producing at the beginning of the support program will be allowed to produce more than they did before the program started.
It will be rationed among suppliers.
One of the easiest ways to restrict supply is by grandfathering in existing suppliers.
Existing growers were allowed to grow tobacco on land they were currently using for tobacco production when supply limitations were placed on tobacco.
They couldn't grow tobacco on any new land.
Foreign producers are the easiest targets when it comes to keeping groups out of production.
Foreign imports and domestic production must be limited to keep the domestic price of a good up.
U.S. taxpayers are likely to object to subsidizing foreign farmers.
Most farm subsidy programs include tariffs and quota on foreign imports of the same commodity.
Even though the average farmer is constrained as to how much can be sold, he or she is made better off by that constraint because the total revenue going to all farmers is higher than it would be.
Making the farmer bet is not free.
Consumers are made worse off because they have to pay more for wheat.
The cost of administering the regulations is the direct cost to taxpayers.
It shows how much income society loses but farmers don't get.
The government can keep a price high by giving farmers incentives to reduce supply.
In the 1960s, it was possible to pay farmers not to grow wheat, as it was done under President John F. Kennedy.
The government would have to pay farmers for the wheat they didn't grow.
There is a problem in figuring out who would supply wheat at $5 a bushel.
The Case of Agricultural Markets 8W-9 wheat will pretend that at $5 they would, just to get the subsidy.
This approach is often combined with regulatory restric tions to avoid this problem.
They are forbidden to produce.
Existing farmers do well when economic incentives are provided.
There are two reasons their income goes up.
Farmers can use the land taken out of wheat production for anything other than growing wheat, so their income goes up when they use the land for something other than growing wheat.
Consumers are being hurt again because they are paying a higher price and getting less.
This option is more expensive than the regulatory option.
The third option is for the government to subsidize the sale of the good to hold down the price consumers pay but keep the amount suppliers receive high.
The 2 are paid $5 per crop.
The government sells that quantity at whatever price it can get.
There is no direct transfer from the consumer to the supplier.
Consumers get more goods at a lower price.
Suppliers can supply all they want at a higher price.
The catch is that taxpayers foot the entire bill, so if taxpayers paid the price support, the difference between the $5 and the $1.75 would be favored by them.
The most expensive option is the one that costs taxpayers the most.
The final option is for the government to buy up all the quantities that the consum ers don't buy at the support price.
The situation is similar to our second option, in which the government gives suppliers incentives not to produce.
The government takes on the problem of what to do with the surplus if it buys sur plus wheat.
The government might give it to the poor.
The poor will replace some of their purchases with free food in response to a free-food program.
The Power of Traditional Economic Models replacement brings about a drop in demand, which means that the government must buy more surplus.
The government can burn the surplus or keep it in warehouses and grain elevators.
Burning up the sur plus doesn't increase the amount the government has to buy.
Giving the surplus to the foreign poor creates problems in those countries as well as in the United States.
The foreign poor are likely to spend most of their income on food.
The price for those who previously sold them food would be lowered if they were given free food.
When markets are destroyed someone gets upset.
There are four price support options that can be used in a variety of combinations.
It's useful to think through which of the options farmers, taxpayers, and consumers would likely favor and to relate current debates about farm programs to these options.
Information is posted the least by agriculture.
Current farm legislation is likely to be pushed for price by existing farmers.
Most of the required reduction in quantity supplied will come from people who might enter farming in the future, not from existing farmers.
The second option, economic incentives, costs the government less than the first, third, and fourth options.
Farmers benefit from economic incentive programs.
They can sometimes get additional income from using the land for other purposes if they don't grow a certain crop.
When farm ers aren't allowed to use their land for other purposes, they prefer the third or fourth option.
Subsidies on the sales help both consum ers who get low prices and farmers who get high prices.
Taxpayers are hurt the most by this option.
They need to finance the subsidy payments.
The last option, buying up and storing or destroying the goods, costs taxpayers more than the first two options but less than the third since consumers pay part of the cost.
The government has a surplus to deal with.
If there is a group who can take that surplus without significantly reducing their current demand, then they are likely to support this option.
Our first option, that supports prices through regulation, hasn't been applied to existing farmers.
They are often used to prevent new farmers from entering the market.
The third option, to subsidize the sale of the good so the farmer gets a high price and the consumer pays a low price, hasn't been used because it would be the most costly to taxpayers.
In 1996 the U.S. government voted for third to compensate farmers for reforms designed to eliminate the elimination of direct price supports.
What made the po farmers do what they did.
The grants were scheduled to start at $5.8 billion in 1998 and end at $4 billion in 2002.
The ability of U.S. farmers to sell abroad was reduced when the law was passed because of high agricultural prices.
In the early 2000s, prices fell.
When we look at the reforms more carefully, they see a large farm bill that was reintroduced and expanded less sweeping than they first appeared.
There are three deaths to U.S. farmers.
Despite pressure from the World to reduce them, these subsidies were still in place.
In a number of rounds of international cooperation, the United States and Europe were unwilling to use price support systems.
Reducing farm subsidies is the most important thing.
The program that allowed farmers to borrow hasn't changed.
Every five years a new farm bill is passed and money is cheap from the government, using the expected despite the high cost to the taxpayers.
When the price of the subsidization changes and the crop is less than the prices set as collateral, farmers can default on the loan and not pay it back.
Changes benefit this sector.
The change in nature made it possible for politicians to reduce farm subsidies even though the overall subsidies would keep prices up.
Increase is the method of price support.
The political debate is more complex than presented here.
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