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Agriculture: Economics and Policy Chapter 20 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior.

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Presentation on theme: "Agriculture: Economics and Policy Chapter 20 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior."— Presentation transcript:

1 Agriculture: Economics and Policy Chapter 20 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2 20-2 Economics of Agriculture Extreme diversity Farm products and food products Short-run price and income instability Inelastic demand Fluctuations in output Fluctuation in demand Dependence on world markets LO1

3 20-3 Economics of Agriculture LO LO1 1 Source: Derived from the authors from Foreign Agricultural Trade of the United States, www.ers.usda.gov/Data/FATUS; and Bureau of Economic Analysis, www.bea.govwww.ers.usda.gov/Data/FATUS

4 20-4 Economics of Agriculture LO1 Source: Author calculations using nominal values from Global Financial Data, globalfinancialdata.com, adjusted for inflation with the GDP deflator published by the Bureau of Economic Analysis, bea.gov

5 20-5 The Long Run: A Declining Industry Supply increased rapidly Technological progress Demand increased slowly Inelastic with respect to income Population growth LO2 O2

6 20-6 The Long Run: A Declining Industry Major consequences Increased minimum efficient scale (MES) Consolidation Agribusiness Massive exit of workers Farm labor 1.1% of labor force Farm-Household Income LO2

7 20-7 Economics of Farm Policy Subsidized since 1930s Support for agricultural prices, income, and output Soil and water conservation Agricultural research Farm credit Crop insurance Subsidized sale of farm products in world markets LO3

8 20-8 Economics of Farm Policy Rationale for farm subsidies Necessities of life “Family farm” institution Extraordinary hazards Competitive markets for output while inputs have significant market power LO3

9 20-9 Economics of Farm Policy Agricultural Adjustment Act of 1933 established parity concept Particular real output results in same real income Preserve purchasing power Rationale for price supports Parity Ratio = Prices Received by Farmers Prices Paid by Farmers LO3

10 20-10 Economics of Farm Policy Economics of price supports Effective price floor Generates surplus output Gain to farmers Loss to consumers Efficiency losses Other social losses Environmental costs International costs LO3

11 20-11 Economics of Farm Policy Reduction of surpluses Restricting supply Acreage allotments Bolstering demand Gasohol Biodiesel Corn-based ethanol The ethanol program Higher food prices Secondary effects LO3

12 20-12 Criticisms and Politics Criticisms of parity concept Criticisms of price supports Symptoms not causes Misguided subsidies Policy contradictions LO4

13 20-13 The Politics of Farm Policy Public choice theory revisited Changing politics Declining political support World trade considerations Recent farm policy Freedom to Farm Act of 1996 Food, Conservation, and Energy Act of 2008 Direct payments Countercyclical payments (CCPs) Marketing loans LO5

14 20-14 The Sugar Program Price supports Domestic costs Import quotas Developing countries U.S. efficiency loss Global resource misallocation


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