price vs. income support price support – production controls income support – involves...
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Price vs. Income Price vs. Income SupportSupport
• Price support –
• Production controls
• Income support – involves government support of farm income−
−
−Income is supported but price is not supported
Price and Income Support Price and Income Support (combined)(combined)
(Basically raises price and thus also supports (Basically raises price and thus also supports income)income)
• Purchase program−
• Nonrecourse loan (CCC LR)− −
• Production control (ARP)−
Government Purchase Government Purchase ProgramProgram
• Government stands willing to purchase
• What happens in the market?• Will need to know
– Where is support price relative to competitive equilibrium?
– Impact on Quantity Supplied– Impact on Quantity Demanded by consumers– Quantity purchased by government– Does elasticity of supply and demand matter?
Nonrecourse LoanNonrecourse Loan
• Why a loan?– Lowest Prices typically at harvest– Allows farmer to store and market
• Farmer takes out loan from Commodity Credit Corporation (CCC) = loan rate (LR) * production
• Repayment Options– Sell crop and repay loan plus interest– Forfeit crop (no recourse for forfeiture)
Nonrecourse Loan Rate (Case Nonrecourse Loan Rate (Case #1)#1)
• Is it Price or Income Support?
• Set below competitive equilibrium
• Does it matter?
– Why not?
– Why?
$
P1
D
q 1Q/yr
S
LR
Nonrecourse Loan Rate (Case #2)Nonrecourse Loan Rate (Case #2)
• Set above competitive equilibrium
• Does it matter?
$
P1
D
q 1Q/yr
S
LR
qd2 qp2
CCC stocks
Acreage Reduction ProgramAcreage Reduction ProgramNo Nonrecourse LoanNo Nonrecourse Loan
• What happens?
• Any guess at why it isn’t drawn as a parallel shift?
$
P0
D0
Q/yr
S0
q1
S1
q0
P1
Acreage Reduction ProgramAcreage Reduction ProgramWith Nonrecourse Loan #1With Nonrecourse Loan #1
• What happens?
• Does the LR do anything?
$
P0 = LR
D0
Q/yr
S0
qd1= qs1
S1
qd0
P1
qs0
CCC Stocks0
Acreage Reduction ProgramAcreage Reduction Program With Nonrecourse Loan #2With Nonrecourse Loan #2
• What happens?
• Does the LR do anything?
$
P1=P0 = LR
D0
Q/yr
S0
qd0 = qd1
S1
qs1 qs0
CCC Stocks0
CCC Stocks1
Loan Rate with Export Demand
• Set above competitive equilibrium in domestic market and above TD curve
• Does it matter?
$
P1
DD
q1 Q/yr
S
LR
qd2 qp2
CCC stocks
TD
Loan Rate with Export Demand #2
• Set above competitive equilibrium in domestic market and above ED curve
• Does it matter?
$
D
Q/yr
S
LR
qdd qp
CCC stocks
TD
qed
ExportDemand
DomesticDemand
Loan Rate Below International Equilibrium
• Set below competitive equilibrium
• Does it matter?
$
D
Q/yr
S
LR
qdd qp
TD
ExportDemand
DomesticDemand
P
Target Price (Case #1)
• Is it Price or Income Support?
• Set below competitive equilibrium
• Does it matter?
– Why not?
– Why?
$
P1
D
q 1Q/yr
S
TP
Target Price (Case #2)
• Set above competitive equilibrium
• Does it matter?
$
P1
D
q 1Q/yr
S
TP
Qp2= Qd2
No CCC stocks
MP
DeficiencyPayments
Target Price (Case #2a)
• Another way to look at this
• Supply curve vertical until above target price
$
D
Q/yr
S
TP
Qp2= Qd2
No CCC stocks
MP
DeficiencyPayments
Target Price & Loan Rate (Case #1)
• Both set above competitive equilibrium
• Now what happens?
$
LR
D
Q/yr
S
TP
Qp2
CCC stocks
MP
DeficiencyPayments
Qd2
If loan rate wasn’t effective thisWould be the market price
Target Price & Loan Rate (Case #2)
• Target price set above competitive equilibrium and loan rate below market price
• Now what happens?
$
LR
D
Q/yr
S
TP
No CCC stocks
MP
DeficiencyPayments
Qp2= Qd2
Target Price & Loan Rate (Case #3)
• Both set below competitive equilibrium
• What are the impacts?
$
LR
D
Q/yr
S
TP
No CCC stocks
MP
Qp2= Qd2
Target Price and Loan Rate with Export Demand
• Set above competitive equilibrium in domestic market and above ED curve
• Does it matter?
$
DD
Q/yr
S
TP
qd2 qp2
No CCC stocks
TDLR
MP
InternationalDemand
DomesticDemand
DeficiencyPayments
Question: How can we get price from
current $2/bu to desired $3/bu?
• What can you do?
$
DD
Q/yr
S
TD
MP = $2.00
Question: How can we get price from
current $2/bu to desired $3/bu?
• What can you do?– Supply control
$
DD
Q/yr
S
TD
MP = $2.00
S2
Qd1=Qp1Qd2=Qp2
Question: How can we get price from
current $2/bu to desired $3/bu?
• What can you do?– Supply
control– Price
support
$
DD
Q/yr
S
TD
MP = $2.00
LR = MP = $3.00
qd2 qp2
Qd1=Qp1
Question: How can we get price from
current $2/bu to desired $3/bu?
• What can you do?– Supply
control– Price support– Export
subsidy
$
DD
Q/yr
S
TD
MP = $2.00
MP = $3.00
qdd2 qp2
Qd1=Qp1
InternationalDemand
TD2