2. Davis, Kevin 1
Farm subsidies are always a favorite target for budget cuts or expansion for political
parties. Farm subsidy programs began in the 1930’s has way to counteract low food prices and
support the multitude of struggling farmers during the great depression. These programs were
later expanded to support welfare programs such as food stamps. Recently many politicians on
both sides of the aisle have discussed cutting large portions of farm assistance programs. Many
lobbyist and special interest groups have responded that cutting farm subsidy programs would be
a cataclysmic policy mistake. However, supporters of farm subsidies do not realize the cost that
these farm subsidies have made on the agriculture economy. Furthermore, supporters of farm aid
do not realize the consequences of people behaving rationally are contrary to their efforts of
supporting farmers and supplying an adequate and consistent food supply. When critical analysis
tools of political economy are used to evaluate the effectiveness of farm subside programs, then a
clear case can be made that these farm aid programs do more harm than good. A recent editorial
in the “The Times and Democrat”, cited multiple reasons why Americans should support farm
subsidies. However, many of the arguments do not hold up to scrutiny.
One claim that the editorial makes is that farm subsidies lead to cheaper foods, but that
statement is not entirely correct.1 Subsidies can lead to cheaper prices, but in the case of farm
subsidies they do not lower prices. As seen in figure 1, even when subsidies do create cheaper
prices then they come at a cost, because subsidies create a deadweight loss. 2 In this case a dead
loss weight is when the government’s cost to provide the subsidy is greater than the amount of
the lower prices the consumers are receiving. The dead weight loss is never regained and does
not transfer anywhere, it disappears for no ones gain.3 Furthermore, the subsidies send unclear
scarcity signals. For instance, the program was created to compensate farmers from low crop
prices, but some subsidies pay farmers regardless of market prices, so farmers produce more
3. Davis, Kevin 2
crops in an effort to make more money. Therefore, the market becomes over supplied with crops,
which lowers the prices even more than the original price that the government was trying to
alleviate farmers from in the first place. Farm subsidies also create another problem; since
farmers receive an income regardless of crops produced then a price floor is created.
Figure 1
The author of the editorial claims that the United States has the lowest food prices in the
world.4 However the author does take into account that they could be even lower without the
farm subsidies. Price floors are often set for agricultural products in the form of subsidies. For
instance, subsidies are based on traditional prices of agricultural products, and many subsidy
programs will compensate farmers when prices fall below the normal rate. A price floor raises
prices, because producers are supplying as much as they can to meet the price level, but
consumers are unwilling to pay the higher prices.5 Price floors compound the problem of
agricultural surpluses created by the initial subsidy. Since, people behave rationally, then they do
not buy more then what they need due to the higher price, but producers are still supplying goods
4. Davis, Kevin 3
as if they were demanded at that price. The price floor adds to the surplus problem, but in this
case raises prices, instead of lowering prices as with normal subsidy programs, such as the first
example. The raised prices from the price floor counteract any cheaper cost that the consumer
obtained through the subsidies. Also, a price floor creates a dead weight loss and shrinks the
consumer surplus. The consumer surplus is the difference between what consumers are willing to
pay and what they do pay.6 Consumer surpluses are great for consumers, because they buy more
goods at a cheaper a price. Since people behave rationally and buy more goods at cheaper prices,
the price floor prevents the consumer from buying as much as they would want to. Proponents of
farm subsidies have greatly underestimated the effects of the price floors the government sets
with farm subsidies and consumers have been paying the price. Similarly, a producer surplus is
the amount that the producer receives for an item that is more than what he is willing to receive.
As can be seen in figure 2 price floors create more deadweight loss and producer surplus, while
shrinking the consumer surplus. In this scenario consumers are getting less food for more money,
and since they are not buying as much product as they normally would, then the dead weight loss
is increased also. 7
Figure 2
5. Davis, Kevin 4
The author of the article also suggests that without subsidies when farmers are hit to hard
from low prices then they will abandon the land, which is also not true.8 Most farmers have
insurance for just that reason. However, farm subsidies discourage competition and create a
barrier to individuals that wanted to enter the market. The surplus created from the examples
above discourages the need for new farms. Also, many farm subsidies will pay farmers not to
grow crops on certain lands in an effort to try and control supply and also for land conservation.9
In turn this makes farmland scarcer and more expensive for new farmers to obtain, which creates
another hurdle for farmers wanting to enter the market.
An important aspect that is ignored by the author of the editorial is that all of these
hurdles mean that only experienced and wealthy farms remain, and since they are receiving
subsidies they are there to stay. Many detractors of farm subsidies claim that farm subsidies only
benefit the farming corporations and promote monopolies that further raises foods price. 10 When
large corporations dominate the market, then a market failure occurs. The market failure occurs,
because larger farms are price takers and as they expand have more influence over the industry.
As an industry moves toward monopolies, then the deadweight losses increase also.11
The current American system of farm subsidies seems to be incompatible with the
Kaldor-Hicks theory also. The Kaldor-Hicks model is way of determining, if policies are
beneficial, by analyzing if there are more winners than losers and that they are Pareto superior or
Pareto optima. The situation is Pareto superior, if all participants prefer one situation over
another. Also, situations can be considered Pareto optima if some situations are preferred by
some, but not all. In this situation, then we could use the consumer surplus model to see who the
winners and losers are. The consumer surplus analysis allows policy analyst to see that there are
few winners in the farm subsidy programs. There is a consumer surplus created from the subsidy
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itself, but is counter acted by the dead weight losses and producer surpluses created from price
floors. Another useful tool to analyze whether or not the farm subsidies are beneficial is to use a
decision tree. A decision tree would allow an analyst to assign probabilities to certain out comes
and then evaluate if any of the out comes were positive. A positive result would mean that the
policy would pass the Kandor-Hicks theorem, since the effects would result in a value greater
than the status quo. Figure 3 shows a theoretical decision tree for deciding if farm subsidies are
good policy choices. In this example farm subsidies should be ended, since the expected value of
ending farm subsidies is 20.6 billion. The expected value is then subtracted from the expected
value of maintaining the current system the result is a net expected value of 6.6 billion a positive
number that means the policy should be implemented.
Obviously most farmers and agriculture lobbyist support farm subsidies. As the article
argues, farm subsidies supporters argue that farm subsidies provide a stable food supply and
cheap foods. However, analyses of farm subsidy programs show that the disadvantages far out
number the advantages of farm subsidies. Farm subsidy bills are grossly expensive. The rational
choice in analyzing farm subsidies would be to eliminate them. Once farm subsidies are
dramatically reduced or eliminated, then there would be more competition, cheaper prices, and
taxpayers would save money. Also, people would also behave rationally and the catastrophic
disasters of unstable prices and supply of food would not occur.
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1 Author Unknown, “Farm Subsidies: Misunderstood but important”, Paragraph 10. “The Times
and Democrat”. http://thetandd.com/news/opinion/editorial/farm-subsidies-misunderstood-but-
important/article_512701bc-98f5-11df-8c44-001cc4c002e0.html
2 Mitchell, Matt. “Why do almost all economists oppose U.S. farm policy?”
http://neighborhoodeffects.mercatus.org/2013/07/09/why-do-almost-all-economists-oppose-u-s-
farm-policy/ This graph was taken from this article.
3 Munger, Michael. “Analyzing Policy”. Pg. 108
4 Author Unknown, “Farm Subsidies: Misunderstood but important”, Paragraph 11. “The Times
and Democrat”. http://thetandd.com/news/opinion/editorial/farm-subsidies-misunderstood-but-
important/article_512701bc-98f5-11df-8c44-001cc4c002e0.html
5 Munger, Michael. Pg. 230
6 Munger Michael Pg. 106
7 Mitchell, Matt. “Why do almost all economists oppose U.S. farm policy?”
http://neighborhoodeffects.mercatus.org/2013/07/09/why-do-almost-all-economists-oppose-u-s-
farm-policy/ This graph was taken from this article.
8 Author Unknown, “Farm Subsidies: Misunderstood but important”, Paragraph 11. “The Times
and Democrat”. http://thetandd.com/news/opinion/editorial/farm-subsidies-misunderstood-but-
important/article_512701bc-98f5-11df-8c44-001cc4c002e0.html
9 Edwards, Chris. “Agricultural Subsidies”.Paragraph 1. 2009.
http://www.downsizinggovernment.org/agriculture/subsidies
10 Edwards, Chris. Paragraph One
11 Munger, Michael. Pg. 118.
