Rent Interest Profits Chapter 31
Government Subsidies Provide Externality Benefits at a Cost
A. The need for government subsidies lie somewhere between
     the "clear" benefit of lowering the externality costs of severe
     pollution to the questionable economic benefit of "pork
     barrel" (political patronage) programs often generated by
     logrolling (trading votes in congress). See Golden Fleece Award
B. Often the desire by consumers to receive a surplus is balanced
    with industry's desire for increased economic rent.
Subsidies, Direct Controls and Taxes Affect Equilibrium
A. Affecting demand
    1. Tax credits, tax preferences, and loan programs to agriculture and education...
         increase taxpayer  demand by the taxpayers' marginal tax rate.
    2. Government supports industries like defense and agriculture with large purchases.
B. Affecting supply
    1. Supporting industries such as agriculture and education with subsidies (loans,
        inexpensive insurance...) increases supply lowering price, increasing quantity sold. 
    2. Organizations such as the Export-Import Bank of the United States, which
        supports export industries, have similar effects.
   3. The Clean Air Act of 1990 limited pollution by decreasing supply because
        this increase in marginal cost.
Agriculture markets (both buyers and producers)
A. Farers sell in an uncertain domestic market 
     Foreign Markets make this much less of a problem
     1. Demand is very inelastic as people's physical needs are limited and
         lowering price will not substantially  increase quantity sold.
     2. Demand increases slowly for most agricultural
         products as many are inferior goods for which
         quantity demanded decreases as income increases.
     3. Supply is very inelastic in the short run as crops grow slowly.
     4. Supply is volatile because of the weather.
     5. Technology has caused supply to increase substantially.
     6. Annual supply fluctuations cause the prices farmers receive
        and resulting revenue to fluctuate considerably.
B. Solving the farm problem with price supports using parity pricing. 
    1. Prices received by farmers should be kept high enough to
        allow a certain amount of agricultural  output to purchase
        constant amounts of goods and services.
        a. A ratio of prices received for crops to prices
           paid by farmers to live was created using data
           from 1910 to 1914 as a base.
        b. 100% parity would mean each dollar earned
            would have a constant value, i.e., revenue from
            a bushel of corn would always buy a toothbrush.
        2. Methods of achieving parity pricing
             a. Increase demand
                 1) Provide programs for the needy (school lunch program). 
                 2) Direct purchase and storage.
                 3) Encouraging the free international trade of agricultural
             b. Regulate supply with soil conservation programs.
             c. Decrease risk with subsidized crop insurance
                and inexpensive loan programs.
        3. Historically prices paid by farmers have increased
             more rapidly than prices received. 
            a. This caused a decline of the family farm
                and the industrialization of agriculture. 
            b. These changes have complicated
                questions concerning agricultural policy.
C. Price supports are basically a price floor resulting in
     higher prices and a surplus of production.
D. The question of consumer surplus and economic rent need to be addressed.
     1. In 1991 federal appropriations for agriculture were $52 billion, of which
          more than $30 billion were subsidies designed to keep farm prices high.
     2. Government activity to help farmers adds approximately $400 annually to
         the cost of food purchased by the average American family of four.