Corn is a very valuable product for which the U.S. government routinely offers s

Question

Corn is a very valuable product for which the U.S. government routinely offers subsidies. With no price support, the equilibrium price for corn is $300 per ton and the equilibrium quantity is 500 million tons per year. Suppose that the government agrees to pay farmers $350 for every ton of corn they produce and can't sell in the market. According to the farmer's market supply curve, 600 million tons per year is supplied at the price of $350 a ton, so production should increase to this amount. However, domestic users of corn cut back their purchases. Only 450 million tons a year is demanded at the price of $350 a ton, and purchases decrease to this amount. Farmers continue to produce 500 million tons of corn per year, so because they produce a greater quantity of corn than domestic buyers are willing to purchase, something must be done with the surplus. To make the price support work, the government decides to buy the surplus. In this example, how many million tons does the government agree to buy? At what price? How much in total does the U.S. government provide in subsidy to the corn farmers? Why? Is the price support in this example efficient or inefficient? Explain your reasoning. Is the subsidy fair? Explain your reasoning.

Explanation / Answer

With no price support,P=300 $, Q=500 million tons

Floor price Pf = 350$ ,Qs =600 million tons,Qd=450 million tons

Govt buy surplus=Qs -Qd =600-450=150 million tons at price= 350 $

Ps=350=P* +subsidy/2=300+subsidy/2

subsidy=100 $

So subsidy is better than price support because deadweight loss from subsidy is less than deadweight from price support.Hence price support is not efficient due to its deadweight loss.

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