Chapter 22 – Agriculture: Economics and Policy
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Chapter 22 – Agriculture: Economics and Policy
McConnell Brue Flynn 21e
DISCUSSION QUESTIONS
1. Carefully evaluate: “The supply and demand for agricultural products are such that small
changes in agricultural supply result in drastic changes in prices. However, large changes in
agricultural prices have modest effects on agricultural output.” (Hint: A brief review of the
distinction between supply and quantity supplied may be helpful.) Do exports increase or reduce
the instability of demand for farm products? Explain. LO1
2. What relationship, if any, can you detect between the facts that farmers’ fixed costs of
production are large and the supply of most agricultural products is generally inelastic? Be
specific in your answer. LO1
3. Explain how each of the following contributes to the farm problem: LO1, LO2
a. The inelasticity of demand for farm products.
b. The rapid technological progress in farming.
c. The modest long-run growth in demand for farm commodities.
d. The volatility of export demand.
Chapter 22 – Agriculture: Economics and Policy
4. The key to efficient resource allocation is shifting resources from low-productivity to high-
productivity uses. In view of the high and expanding physical productivity of agricultural
resources, explain why many economists want to divert additional resources away from farming
in order to achieve allocative efficiency. LO2
5. Explain and evaluate: “Industry complains of the higher taxes it must pay to finance subsidies
to agriculture. Yet the trend of agricultural prices has been downward while industrial prices have
been moving upward, suggesting that on balance agriculture is actually subsidizing industry.”
LO3
6. “Because consumers as a group must ultimately pay the total income received by farmers, it
makes no real difference whether the income is paid through free farm markets or through price
supports supplemented by subsidies financed out of tax revenue.” Do you agree? LO3
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7. If in a given year the indexes of prices received and paid by farmers were 120 and 165,
respectively, what would the parity ratio be? Explain the meaning of that ratio. LO3
8. Explain the economic effects of price supports. Explicitly include environmental and global
impacts in your answer. On what grounds do economists contend that price supports cause a
misallocation of resources? LO3
9. Do you agree with each of the following statements? Explain why or why not. LO3, LO4
a. The problem with U.S. agriculture is that there are too many farmers. That is not the fault of
farmers but the fault of government programs.
b. The Federal government ought to buy up all U.S. farm surpluses and give them away to
developing nations.
c. All industries would like government price supports if they could get them; agriculture has
obtained price supports only because of its strong political clout.
Chapter 22 – Agriculture: Economics and Policy
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consent of McGraw-Hill Education.
Answer:
a. Yes, historically the problem has been one of too many farmers, and public policy has
been oriented toward supporting farm prices and incomes rather than fixing the resource
allocation problem. Further, price and income supports have kept people in agriculture
that otherwise would have moved to nonfarm occupations.
b. No, this is not the best way for the U.S. to provide foreign aid. This policy would
contribute to the misallocation of resources in the U.S. and prevent a more efficient
solution. Farmers elsewhere in the world who might have a comparative advantage over
American farms would be harmed, perhaps forcing them to leave the industry.
c. While strong political clout has played a role in the price supports given to farmers,
there were other more important factors. Government has subsidized American
agriculture since the 1930s. Agricultural prices and incomes are more volatile than in
most other industries. Small changes in farm output translate into a relatively large
change in price because the demand for these products is price inelastic. In the absence of
government intervention, agricultural markets are highly competitive and farmers have
no control over the price they receive for their goods. However, farmers must buy their
supplies and capital equipment in markets where producers have a high degree of control
over price. This disparity and disadvantage along with a variety of other arguments has
been used to justify farm subsidies over the years. Likewise, government support
programs come with government intervention into management decisions by farmers.
10. What are the effects of farm subsidies such as those of the United States and the European
Union on (a) domestic–agricultural prices, (b) world agricultural prices, and (c) the international
allocation of agricultural resources? LO3
Chapter 22 – Agriculture: Economics and Policy
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
There is an international misallocation of agricultural resources. Wherever there is a farm
subsidy program without programs restricting supply, there will be an expansion of
production in response to the above-market price supported. Without such restrictions,
continuing farm subsidies would mean that more than the efficient amount of resources is
devoted to production of subsidized products. The over-allocation occurs both within and
among countries. Farmers in countries that might more efficiently import agricultural
products and use these resources more productively in other pursuits are encouraged to
remain in agriculture as long as their governments subsidize this type of production.
Meanwhile, farmers in countries without farm programs face artificially depressed world
market prices and find it is not profitable to raise farm products for export. In a
free-market world, they might be more efficient producers than their subsidized
neighbors.
11. Use public choice theory to explain the persistence of farm subsidies in the face of major
criticisms of those subsidies. If the special-interest effect is so strong, what factors made it
possible in 1996 for the government to end price supports and acreage allotments for several
crops? LO4
12. What was the major intent of the Freedom to Farm Act of 1996? Do you agree with the
intent? Why or why not? Did the law succeed in reducing overall farm subsidies? Why or why
not? LO5
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13. Distinguish between price loss coverage and agricultural risk coverage. How do they help
reduce the volatility of farm income? In what way do farm subsidies perpetuate the longstanding
problem of too many resources in agriculture?LO5
Answer:
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14. LAST WORD What groups benefit and what groups lose from the U.S. sugar subsidy
program?
REVIEW QUESTIONS
1. Suppose that the demand for olive oil is highly inelastic. Also suppose that the supply of olive
oil is fixed for the year. If the demand for olive oil suddenly increases because of a shortage of
corn oil, you would expect a in the price of olive oil. LO2
a. Large increase.
b. Small increase.
c. Large decrease.
d. Small decrease.
e. No change.
2. Use supply and demand curves to depict equilibrium price and output in a competitive market
for some farm product. Then show how an above-equilibrium price floor (price support) would
cause a surplus in this market. Demonstrate in your graph how government could reduce the
surplus through a policy that (a) changes supply or (b) changes demand. Identify each of the
following actual government policies as primarily affecting the supply of or the demand for a
particular farm product: acreage allotments; the food-stamp program; the Food for Peace
program; a government buyout of dairy herds; export promotion. LO3
Chapter 22 – Agriculture: Economics and Policy
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Answer:
Average allotments: decrease supply
Food stamp program: increase demand
Food-for-Peace: increase demand
Government buyout of dairy herds: decrease in supply
Export promotion: increase in demand
3. Suppose that the government has been supporting the price of corn. Its free market price is
$2.50 per bushel, but the government has been setting a support price of $3.50 per bushel. Which
of the following are ways that the government might try to reduce the size of the corn surplus?
LO3
Select one or more answers from the choices shown.
a. Decrease the support price.
b. Institute an acreage allotment program.
c. Decrease demand by taxing purchases of corn.
d. Raise the support price.
4. The majority of farm subsidies flow toward ____________. LO4
a. Poor, small-scale farmers.
b. Rich, large-scale farmers.
c. Government employees.
d. Grain wholesalers.
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5. Which of the following are elements of current U.S. farm policy? LO5
a. Farmers are free to choose how much to plant of any particular crop.
b. Direct payments.
c. Price supports.
d. Countercyclical payments.
PROBLEMS
1. Suppose that corn currently costs $4 per bushel and that wheat currently costs $3 per bushel.
Also assume that the price elasticity of corn is .10 while the price elasticity of wheat is .15. For
the following questions about elasticities, simply use the percentage changes that are provided
rather than attempting to calculate those percentage changes yourself using the midpoint formula
given in Chapter 4. LO1
a. If the price of corn fell by 25 percent to $3 per bushel, by what percentage would the quantity
demanded of corn increase? What if the price of corn fell by 50 percent to $2 per bushel?
b. To what value would the price of wheat have to fall in order to induce consumers to increase
their purchases of wheat by 5 percent?
c. If the government imposes a $.40 per bushel tax on corn so that the price of corn rises by ten
percent to $4.40 per bushel, by what percentage would the quantity demanded of corn decrease?
If the initial quantity demanded is 10 billion bushels per year, by how many bushels would the
quantity demanded decrease in response to this tax?
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Feedback: Part a: To find the percentage change in the quantity of corn demanded
multiply the percentage change in price by the elasticity. Note that the quantity direction
Part b: Here we can use the same formula as above (note the negative in front of the price
change. A fall in the price will be recorded as a negative percentage change
2. Suppose that both wheat and corn have an income elasticity of .1. LO1
a. If the average income in the economy increases by 2 percent each year, by how many
percentage points does the quantity demanded of wheat increase each year, holding all other
factors constant? Holding all other factors constant, if 10 billion bushels are demanded this year,
by how many bushels will the quantity demanded increase next year if incomes rise by 2 percent?
b. Given that average personal income doubles in the United States about every 30 years, by
about how many percentage points does the quantity demanded of corn increase every 30 years,
holding all other factors constant?
Feedback: Part a: To calculate the percentage change in quantity demanded multiply the
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3. Suppose that 10 workers were required in 2010 to produce 40,000 bushels of wheat on a 1,000–
acre farm. LO2
a. What is the average output per acre? Per worker?
b. If in 2020 only 8 workers produce 44,000 bushels of wheat on that same 1,000–acre farm, what
will be the average output per acre? Per worker?
c. By how many percentage points does productivity (output per worker) increase over those ten
years? Over those ten years, what is the average annual percentage increase in productivity?
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4. In 2013, it was estimated that the total value of all corn-production subsidies in the United
States totaled about $4.8 billion. The population of the United States was approximately 315
million people that year.. LO3
a. On average, how much did corn subsides cost per person in the United States in
2013? (Hint: A billion is a 1 followed by nine zeros. A million is a 1 followed by six zeros.)
b. If each person in the United States is only willing to spend $.50 to support efforts to overturn
the corn subsidy, and if anti–subsidy advocates can only raise funds from 10 percent of the
population, how much money will they be able to raise for their lobbying efforts?
c. If the recipients of corn subsidies donate just one percent of the total amount that they receive
in subsidies, how much could they raise to support lobbying efforts to continue the corn subsidy?
d. By how many dollars does the amount raised by the recipients of the corn subsidy exceed the
amount raised by the opponents of the corn subsidy?