Posted: December 12th, 2016

Explain the impact of the policy on economic efficiency and resource allocation. Provide reasons for why most governments around the world follow a similar policy in their own countries?

The Government of the United States like many other governments around the world provides dairy farmers with a subsidy. The subsidy comes through the government guaranteeing the product price at a level higher than the market equilibrium price, please answer:
A) Draw the relevant diagram and show the government subsidy graphically?
B) Explain the income distribution effect of this policy by indicate farmers gain and the loss to consumers and or taxpayers?
C) Explain the impact of the policy on economic efficiency and resource allocation. Provide reasons for why most governments around the world follow a similar policy in their own countries?
D) Is there any economic justification for supporting farmers?
E) Argue in writing and graphically, the economic (using market forces) steps that government can take to resolve this problem without bringing a massive bankruptcy to many needy farmers?