agricultural policy - US uses price supports to control domestic market  

• gov't sets price at level higher than that of free-market
• gov't buys up any excess quantity that consumers don't buy
• consumers must buy goods at higher price than if there was a free-market
• gov't must spend money to buy up excess quantity of goods
  • taxes on consumers/public support this, so ultimately the cost falls on the population
  • gov't may try to resell the quantity they buy
• producers sell more >> gain more revenue
  • benefit w/o loss
• more efficient to just pay the farmers directly
  • this method would still force gov't to pay, but consumers wouldn't be affected
• in this method, note that there are essentially 2 consumers (the public and the gov't)
  • maximizes the producer surplus by enhancing their market

• consumer surplus decreases by A+B
• producer surplus increases by A+B+C
• government pays B+C+D
• net effect = producer surplus - consumer deficit - gov't cost = (A+B+C) - (A+B) - (B+C+D) = loss of B+D
• as with most changes, society worse off as a whole