AGRICULTURE AND AGRICULTURAL POLICY

1
AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence of a subsidy
• Subsidy is an amount paid for every unit
  produced. It reduces the cost to the farmer of
  supplying the good and moves the supply curve
  down and out.

2
Effect of subsidies on foodstuffs in which the
country is self-sufficient 1
P
S
Pe
D
Qe
Q
O
3
Effect of subsidies on foodstuffs in which the
country is self-sufficient
P
S
S subsidy
Pe
D
Qe
Q
O
4
Effect of subsidies on foodstuffs in which the
country is self-sufficient
P
Note at Pe farmers willing to supply Q2,
S
S subsidy
But then Supply exceeds demand
Pe
P1
so price must fall to P1
D
Q1
Qe
Q2
Q
O
5
Effect of subsidies on foodstuffs in which the
country is self-sufficient 2
P
S
S subsidy
Pg
Pe
Subsidy
P1
D
Q1
Qe
Q
O
6
Effect of subsidies on foodstuffs in which the
country is self-sufficient
P
S
S subsidy
Pg

• Note two parts to the subsidy in this example
• Getting higher price Pg
• But also selling more, S1
• Depends on epD

Pe
Subsidy
P1
D
Q1
Qe
Q
O
7
Effect of subsidies on foodstuffs which are
partly imported
P
SEU
Pw
Sworld
D
Q
O
8
Effect of subsidies on foodstuffs which are
partly imported
P
SEU
Pw
Sworld
D
Qd
QS1
Q
O
Imports
9
Effect of subsidies on foodstuffs which are
partly imported
P
SEU
S subsidy
Pw
Sworld
D
Qd
QS1
Q
O
10
Effect of subsidies on foodstuffs which are
partly imported
P
SEU
S subsidy
Pw
Sworld
D
Qd
QS1
Q
QS2
O
Imports
11
Effect of subsidies on foodstuffs which are
partly imported
P
SEU
S subsidy
Pg
Pw
Sworld
D
Qd
QS1
Q
QS2
O
12
Effect of subsidies on foodstuffs which are
partly imported
P
SEU
S subsidy
Pg
Pw
Sworld
D
Qd
QS1
Q
QS2
O