© ANSON HUNG/SHUTTERSTOCK

Chapter 

AGRICULTURE:
PROBLEMS,
POLICIES, AND
UNINTENDED
EFFECTS
Introduction The federal government implements many policies
designed to regulate industries. For example, the purpose of antitrust laws is to
control monopoly and to preserve and promote competition. Antitrust laws do
not usually pertain to agriculture, which is considered a perfectly competitive
industry. Nevertheless, the government has set policies and enacted laws that
deal with farmers and agriculture. In fact, the federal government has many
agricultural laws and policies that affect not only farmers but also consumers and
taxpayers. In other words, they affect you.

AGRICULTURE: THE ISSUES

Three issues are of major concern to many farmers: (1) high productivity in the agricul-
tural sector, (2) income inelasticity for specific foods (income elasticity less than 1), and
(3) price inelasticity for specific foods (price elasticity of demand less than 1). Related to
these three issues is the issue of price instability in the agricultural sector.

A Few Facts
In 1930, there were 6.3 million farms in the United States; in 2000, there were 2.1 mil-
lion farms. In 1930, the average size farm was 151 acres; in 2000, the average size farm
was 441 acres. In 1930, 25 percent of the U.S. population worked on farms; in 2000, only
1 percent of the population worked on farms. In 1930, agriculture accounted for 8 percent
of the GDP in the United States; in 2000, it accounted for only 1 percent of the GDP.
In terms of productivity, agriculture productivity has increased more rapidly in the
United States than nonagriculture productivity. For example, agriculture productiv-
ity increased by an average of 2.1 percent annually between 1950 and 2002, whereas
nonagriculture productivity increased by an average of 1.2 percent annually during the

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 CHAPTER 21 Agriculture: Problems, Policies, and Unintended Effects 473

exhibit 1
High Productivity Doesn’t
Always Benefit Farmers as a
S1
Group
(a) Owing to increased agricultural
S2
productivity, the supply curve shifts
rightward from S1 to S2. As a result,
P1 equilibrium price falls and equilib-
E1
rium quantity rises. The demand
Price

Total revenue is lower

at E2 than at E1 (demand curve between E1 and E2 is inelastic,
P2 curve is inelastic so total revenue is lower at E2 than
E2 between E1 and E2). E1. In summary, increased productiv-
ity results in lower prices for consum-
ers and lower revenues for farmers.
D1 (b) We show the links between
productivity increases and a decline
0 Q1 Q2 in total revenue. For farmers as a
(a) Quantity of Food Item group, increased productivity can
lead to lower incomes.

If demand is inelastic,
Productivity Supply Price
a decline in price
increases. increases. falls.
will lower total revenue.

(b)

period. To get an idea of the agriculture productivity increase in the 20th century, keep
in mind that at the beginning of the century, one farmer in the United States produced
enough to feed 8 people, but by the end of the century one farmer produced enough to
feed 35.
High productivity in the agricultural sector has pushed the supply curve of farm
products rightward. For consumers, this is good. Increased supply means more food
at lower prices. For farmers, lower prices do not necessarily mean higher revenues. For
example, if the demand curve for a particular food is inelastic, a lower price brings lower,
not higher, revenues.
Exhibit 1(a) illustrates a rightward shift in the supply curve for a particular food due to
an increase in productivity. As a result, equilibrium price falls, and equilibrium quantity
rises. Because the demand curve between the two equilibrium points, E1 and E2, is inelas-
tic, total revenue is less at E2 than at E1.
In summary, increased productivity results in lower prices for consumers and lower
revenues for farmers. These results are summarized in Exhibit 1(b).

Agriculture and Income Inelasticity

Recall that income elasticity of demand measures the responsiveness of a change in quantity
demanded to changes in income:
Percentage change in quantity demanded
Ey ⫽ ____________________________________
Percentage change in income

If Ey ⬍ 1, the percentage change in quantity demanded is less than the percentage change
in income, and the demand for the good in question is income inelastic. In the United
States, studies show that as real income has been increasing, the per capita demand for

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 474 PAR T 8 Web Chapter

exhibit 2 food has been increasing by much less. Many

High Productivity and Income
Inelasticity Together
Both the demand for and supply of
food have been increasing for most of
this century. High productivity in the
S1
Price
agriculture sector, relative to income
inelasticity for food, has meant that supply
has increased by more than demand. As a
result, prices have fallen.
S2
Supply increases by more
than demand increases.
Result: price falls.
studies put U.S. income elasticity for food at
less than 0.2, which means that as income
increases 10 percent, food purchases increase
by 2 percent.
The combination of income inelasticity
of demand for food and high agricultural
productivity leads to the demand for food
increasing (owing largely to population
growth) and the supply of food increasing
even more (see Exhibit 2). Of course, supply
increases that outstrip demand increases lead
to falling prices.

P1

Agriculture and Price

P2
Inelasticity
If market demand is inelastic and supply is
subject to severe shifts from season to season,
D2 then (1) price changes are likely to be large
D1
and (2) total revenue is likely to be highly
0 Q1 Q2 volatile. This is the case in agriculture.
Quantity of Food Item First, the demand for many agricultural
products is inelastic. For example, the fol-
lowing estimates of price elasticity of demand
(the responsiveness of quantity demanded to changes in price) have been made: cattle,
0.68; chickens, 0.74; corn, 0.54; eggs, 0.23; milk used for cheese, 0.54; potatoes, 0.11;
and soybeans, 0.61.
Second, the supply of many food products changes from one year to the next
because it depends not only on technological and productivity changes but also
on the weather—which, as you know, is subject to sharp changes. For example, in
some years in the Midwest, the weather is excellent, and the corn and wheat crops
are plentiful. In other years, the weather is bad, and the corn and wheat crops are in
short supply.
Exhibit 3 shows two supply curves: SB, which represents the supply of a food item
when there is bad weather, and SG, which represents the supply when there is good
weather. The demand curve, D1, is inelastic in the region relevant to the discussion.
Whether we start at SB (bad weather) and move to SG (good weather) or start at SG
and move to SB, there is a large change in price due to the relatively high inelasticity of
demand for the food item. We would expect, then, that large changes in supply brought
about by changes in weather conditions would in turn bring about relatively large fluc-
tuations in the price of agricultural products.
If large changes in price occur when demand is inelastic, then there will be
large changes in total revenue, or farmers’ gross income. Suppose that demand is
perfectly inelastic and that quantity demanded is thus completely insensitive to
changes in price. If price is $10 and quantity demanded is 100, total revenue is
$1,000. If price drops by 50 percent to $5, total revenue also falls by 50 percent,
to $500, because quantity demanded does not change at all. Thus, large changes
in price bring about large changes in total revenue (farmers’ gross income) when
demand is inelastic.
The instability in price and total revenue (gross income) increases the uncertain-
ties of farming. Typically, farmers say that they have no idea what prices they will get

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 CHAPTER 21 Agriculture: Problems, Policies, and Unintended Effects 475

for their products or what they will earn from one exhibit 3
season to the next. Farmers see this uncertainty as a
major problem. Large Price Changes and total revenue (farmers’ gross income)
Volatile Total Revenue will be volatile. Suppose the supply
curve shifts from SB to SG. As a result,
If demand is inelastic and supply is sub-
Price Variability and Futures ject to severe changes from season to
price falls from PB to PG , and total
revenue falls from PB ⫻ QB to PG ⫻ QG.
Contracts season, price changes will be large and
In the early 1930s, farm incomes were at the mercy of
annual fluctuations in farm prices—a major reason SB (bad weather)
for starting some of the government’s agricultural
SG (good weather)
programs (discussed later in this chapter). Today,
however, the situation is different. For example,
farmers today can insure themselves against adverse
price swings through the futures market. PB EB
Major change in the
Suppose farmer Jones will harvest his wheat in

Price
weather ⫹ inelastic
several months. He says to himself, “Today, the demand ⫽ large change
price of wheat is $4 a bushel, but I’m not selling in total revenue.
wheat today. I plan to sell wheat in several months, PG EG
and by that time, the price of wheat could be higher
or lower than $4. If it’s higher, this will be good for D1
me. But if it’s lower, this will be bad for me. In fact,
0 QB QG
if the price is lower, I might have to go out of busi-
Quantity of Food Item
ness. I don’t want to take that risk.”
To avoid the risk of lower prices in several months,
farmer Jones can enter into a futures contract with
someone who will guarantee to take delivery of his wheat (in several months) for a stated Futures Contract
price. That someone might be speculator Smith, who says to herself, “I believe that the price An obligation to make or take
of wheat is going to be higher in several months than it is today. So I should promise (in a delivery of a specified quantity of
a good at a particular time in the
contract) to pay, say, $4 a bushel to farmer Jones in several months for his wheat. Then, if
future at a price agreed on when the
I’m right and the price of wheat rises, say, to $6, I can sell all the wheat for $6 a bushel and contract is signed.
earn $2 profit per bushel.”
If speculator Smith agrees to enter into such a futures contract, farmer Jones shifts
the risk of price fluctuations to speculator Smith (who is content to assume the risk for
the chance to earn higher profits). Of course, farmer Jones will no longer benefit if the
price of wheat rises above $4, but he may prefer no risk to worrying about his future
income.

Can Bad Weather Be Good for Farmers?

An individual farmer prefers good weather to bad weather, but farmers as a group may
prefer bad weather to good weather. An individual farmer is interested in her total rev-
enue, or price times quantity (P ⫻ Q). The P is determined by the market, and the Q
is largely determined by the individual farmer and the weather. The individual farmer
prefers good weather to bad weather because the better the weather is (up to some
limit), the greater her Q, or output, will be, and therefore the greater her total revenue.
Farmers as a group prefer bad weather to good weather (up to some limit) because bad
weather shifts the supply curve for their product leftward and raises P. If demand is
inelastic, total revenue rises.
Ideally, an individual farmer would want good weather for herself and bad weather
for all other farmers. She would want good weather for herself so that her Q will be high
but bad weather for all other farmers so that total supply will be less and P will be high. A
high Q combined with a high P produces higher total revenue.

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 THE POLITICS OF AGRICULTURE

T
oday, many farmers’ incomes are subsidized. If you were to ask
farmers whether government subsidies should be continued,
most would probably say yes. Of course, that response is
not unreasonable because farmers are the beneficiaries of these
programs.
Taxpayers and consumers, however, have to pay for these programs.
We don’t know for sure whether they find the benefits to farmers
worth the costs to them, but let’s assume they do not. Does it
follow that the programs would be eliminated? After all, taxpayers
and consumers together make up a much larger voting block than
farmers do.
The answer to our question is not necessarily, and the explanation
has to do with concentrated benefits and dispersed costs. To illus-
trate, suppose Congress is considering an agricultural program that,
if passed into law, would place $500 million in the hands of 20,000
farmers. On average, each of the 20,000 farmers would receive
$25,000 from the program. With $25,000 each at stake, these farmers
would probably be willing to pay lobbyists to go to Washington, D.C.,
to argue for the program.
Now let’s look at things from the taxpayer’s perspective. In early 2006,
approximately 130 million tax returns were sent to the Internal
Revenue Service. Some of these tax returns were filed jointly, so let’s
say the returns represent about 160 million taxpayers. If we divide
the $500 million to be spent on farmers (if the program is enacted)
by 160 million taxpayers, the average taxpayer will pay $3.12 for the
program. With only $3.12 at stake, the average taxpayer is not likely to
try to stop the proposed program from becoming law. Many people will
feel it is not worth expending the time and money (for a stamp) to write
and mail a letter to their U.S. senator to argue against the program.
So members of Congress will probably hear from the farmers and their
lobbyists, who want the program to pass, but not from the taxpayers,
who do not want the program to pass. On an individual basis, it is
worthwhile for farmers to speak up in favor of the program (with
$25,000 per farmer at stake), but it isn’t worthwhile for taxpayers to
speak up against the program (with only $3.12 per taxpayer at stake).
Through the concentration of benefits on a relatively few farmers and
the dispersion of costs over millions of taxpayers, proposed legislation
that aids the few at the expense of the many can be passed into law.

SELF-TEST

(Answers to Self-Test questions are in the Self-Test Appendix.)

1. Explain how a farmer can protect herself against adverse price swings.
2. What is the order of preference among (a), (b), and (c) for the individual farmer? Explain your answer.
a. Bad weather for all farmers, including himself.
b. Bad weather for all other farmers but good weather for himself.
c. Good weather for all farmers, including himself.
3. For farmers as a group, when would increased productivity lead to higher total revenue?

Price Support
A government-mandated minimum
price for agricultural products; an
example of a price floor.
476
AGRICULTURAL POLICIES
The U.S. Congress passes a farm bill (agricultural bill) about every five years (the current
bill was passed in 2008). These farm bills authorize certain types of assistance to farmers,
and the assistance is generally designed to increase farmers’ incomes. In this section, we
discuss some of the agricultural policies that have been used in the past to assist farmers
and that assist farmers today.

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 CHAPTER 21 Agriculture: Problems, Policies, and Unintended Effects 477

Price Supports exhibit 4

An agricultural price support is an example of a price floor—a
Effects of an and a surplus results.
government-guaranteed minimum price. Suppose the price support Agricultural Price Fewer bushels of crop X are
for crop X is set at $6 per bushel, which is above the equilibrium price Support bought by private citizens,
(Exhibit 4). At this price, quantity supplied is greater than quantity and government buys
At a price support of $6
demanded, and a surplus results. In addition, private citizens buy less per bushel, consumers of
and stores the surplus (for
of crop X (Q2) at the price support than they would at the equilibrium which taxpayers pay).
crop X pay higher prices,
price (Q1). (We specify private citizens because some of crop X is pur-
chased by government.) We would expect buyers to dislike the price Price
(dollars)
support program because they pay more than the equilibrium price
for what they buy. Price S
Farmers want to get rid of the surplus and could do so by low- Support Surplus
ering price. But, of course, they don’t have to lower price because 6
government buys the surplus at the support price. The government
must then store the purchased good, sometimes at considerable cost.
For the taxpayers, who ultimately have to pay the bill, this is not a 4
happy state of affairs. Thus, the effects of agricultural price supports Equilibrium
are (1) a surplus, (2) fewer exchanges (less bought by private citizens), Price
(3) higher prices paid by consumers of crop X, and (4) government
purchase and storage of the surplus (for which taxpayers pay). A
D
benefit to farmers is that it puts a floor on their income.
0 Q2 Q1 Q3
Restricting Supply Quantity of Crop X

Prices of agricultural products can be increased indirectly by restrict-

ing supply. Suppose the government and farmers want to raise the
price of crop X from $4 to $6 per bushel. One
way to do this is to set a price support at $6. exhibit 5
Another way is to restrict the supply of crop
X enough that price will automatically rise to The Objective of Supply-Restricting The objective of all varieties of supply-
$6 per bushel. The objective is to shift the sup- Agricultural Policies restricting agricultural policies is to shift
the supply curve leftward and raise price.
ply curve leftward from S1 to S2, as shown in
Exhibit 5. Historically, government has used Supply curve that exists
three methods to accomplish this objective: S2
with government supply-
(1) assigning acreage allotments, (2) assigning restricting policies.
market quotas, and (3) paying farmers not to
S1
produce so much of their crops.
Supply curve that exists
ASSIGNING ACREAGE ALLOTMENTS
Price (dollars)

without government supply-

Output is curtailed by limiting the number of restricting policies.
6
farm acres that can be used to produce a crop.
The allowable (total) acreage is distributed
among farmers in a predetermined manner.
4
In some cases, acreage allotment is based on a
farmer’s history of production.
To illustrate how things work, suppose
farmer Thompson has a 10,000-acre farm on
which she plants crop X, and she is limited to D1
planting only 7,500 acres of the crop. The idea
is for all farmers to plant fewer acres of crop X 0 Q2 Q1
so that the quantity brought to market will fall. Quantity of Crop X
As this happens, price rises, ceteris paribus.

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One consequence of restricting acreage is that farmers take their least productive land
out of production and farm their remaining (allowable) acreage more intensively. Con-
sequently, government is not always able to restrict the output of a crop to the degree it
seeks.
Economists often remark that restricting acreage makes it more costly to produce
crops. If farmers have an incentive to farm their allotted land more intensively, they tend
to substitute more expensive resources, such as fertilizer, for less expensive resources, such
as land. (If farmers are combining resources, such as fertilizer, land, and labor, in the
cheapest way possible before the program, any disturbance, such as restricting the use of
land, causes a shift from a less costly to a more costly means of production.)

ASSIGNING MARKET QUOTAS Government does not restrict land usage. Instead,
it sets a limit on the quantity of a product that a farmer is allowed to bring to market.

Target Price
A guaranteed price; if the market
price is below the target price, the
farmer receives a deficiency payment
equal to the difference between the
market price and the target price.
exhibit 6
The Target Price System
With target prices, the govern-
ment guarantees farmers a
(target) price per unit of prod-
uct produced. For example,
if government sets the target
price of crop X at $6 per
bushel, farmers produce Q1
bushels. When this quantity
Price
(dollars)
Target
Price
6 consumers get a lot of cheap crop X for which the government
2
Price at
which Q1
will be
purchased 0
PAYING FARMERS NOT TO PRODUCE Farmers are paid to take part of their land
out of cultivation. (The difference between restricting acreage and paying farmers not to
produce is that under the former, farmers do not receive a direct payment.) When farmers
are paid not to produce so much output, they tend to take their least productive land out
of production and to farm their remaining acreage more intensively.
Target Prices and Deficiency Payments
Another way government can assist farmers is by setting a guaranteed price called a target
price. This is different from a price support in that consumers do
not necessarily pay the target price. In addition, there is no surplus
is placed on the market, for the government to purchase and store.
consumers will pay only $2 As an example, government sets a target price for crop X at
per bushel. The difference $6 per bushel (see Exhibit 6). At this price, farmers choose to
between the $6 target price produce Q1 bushels. However, consumers will not buy Q1 bush-
and the $2 price consumers els of crop X at $6 per bushel. The maximum price consumers
pay is the deficiency payment
will pay per bushel for Q1 is $2, and, under the target price sys-
per bushel that government
pays farmers.
tem, this is exactly what consumers pay. The government, how-
ever, has guaranteed a target price of $6 per bushel; so it makes
a deficiency payment of $4 per bushel to farmers:
Deficiency payment ⫽ Target price ⫺ Market price
S
The total deficiency payment that government makes to farmers
equals $4 ⫻ Q1 [($6 ⫺ $2)Q1]. Under the target price system,
Deficiency
(taxpayers) pays.
Payment or The government can adjust the deficiency payment by deciding
Per-Unit to pay some percentage of the difference between the target price
Subsidy
and the market price. For example, instead of paying 100 percent
of the difference, it could pay, say, 85 percent.
D
Production Flexibility Contract Payments,
Q1
(Fixed) Direct Payments, and Countercyclical
Quantity
of Crop X Payments
Quantity Supplied In 1996, the federal government instituted production flexibility
at Target Price contract payments, which are direct payments to farmers. An
example shows how a farmer’s payment is calculated. Suppose a

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 Q&A ON U.S. AGRICULTURE
Question: What is net farm income equal to, and has it been grow- Question: Are farm land values falling? Is this the reason for the
ing, falling, or remaining constant? subsidies?

Answer: In 2008, it was $92.3 billion, which was 56 percent higher Answer: No. As of June 2008, farm land values had doubled during
than it was in 2006. the period of 2000–2008.

Question: Have crop prices been falling recently? Is this one reason Question: Isn’t a farm bill supposed to deal with small farms and
for the federal government to continue subsidizing farmers? farmers?

Answer: Actually, prices have been going up. The most current farm Answer: Whether or not it is supposed to deal with small farms, it
bill was passed into law in 2008; the farm bill that preceded it was largely does not. The majority of subsidies go to commercial farms,
passed into law in 2002. During the period of 2002–2008, the prices which report an average income of $200,000 and a net worth of nearly
of the five most subsidized crops (wheat, corn, soybeans, cotton, and $2 million.
rice) rose considerably. Market rice prices increased 281 percent, wheat
prices increased 256 percent, corn prices increased 169 percent, soybean
prices increaed 164 percent, and cotton prices increased 105 percent.

corn farmer has 500 acres of land on which he has previously contracted to grow corn.
The federal government may use, say, 85 percent of this contract acreage—or 425
acres—to calculate his payment. The 425 acres is multiplied by the yield per acre. If the
yield is 105 bushels of corn per acre, the total number of bushels used in the payment
calculation is 44,625 bushels. Next, the total number of bushels of corn is multiplied
by a corn payment rate, the amount paid per unit of production to each participating
farmer. Assume that the corn payment rate is $0.41 per bushel. This amount multi-
plied by 44,625 bushels of corn equals $18,296, which is the production flexibility
contract payment for the corn farmer. Thus, the following equation is used to calculate
a farmer’s payment:

Payment ⫽ Contract acreage ⫻ 0.85 ⫻ Yield per acre ⫻ Crop payment rate

In 2002, the federal government replaced production flexibility contract payments

with fixed direct payments, which essentially work the same way as production flexibility
contact payments. The direct payment rates for the period of 2008–2012 include wheat
at 52 cents a bushel, corn at 28 cents a bushel, barley at 24 cents a bushel, peanuts at $36
a ton, soybeans at 44 cents a bushel, and so on.
Countercyclical payments are similar to production flexibility contract payments and
direct payments, but they are based on the difference between an effective price (estab-
lished for a crop) and a target price.

Nonrecourse Commodity Loans

A nonrecourse loan is a type of price support; in fact, granting nonrecourse loans is the
major way the government supports crop prices. To obtain a nonrecourse loan, a farmer
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pledges a quantity of a commodity, such as 1,000 bushels of wheat. The amount of the
loan is equal to the 1,000 bushels times a designated rate per unit called the loan rate.
If the loan rate for wheat is $2.50 per bushel, then the farmer receives a loan of $2,500.
The farmer can either repay the $2,500 loan with interest—in which case he gets back his
1,000 bushels of wheat—or simply keep the loan and forfeit the wheat.
What the farmer will do depends on the market price of wheat relative to the loan
rate. If the market price of wheat is $4 per bushel and the loan rate is $2.50, then the
farmer will pay back the loan ($2,500 ⫹ interest) and sell the 1,000 bushels for $4,000. If,
instead, the market price is $2 per bushel, it is better to keep the loan and forfeit the 1,000
bushels of wheat. In this way, the farmer has been guaranteed a $2.50 price per bushel for
his wheat. In 2009, the loan rate for wheat is $2.75 a bushel, $1.95 a bushel for corn, and
$1.33 a bushel for oats.

SELF-TEST

1. If the target price for a bushel of wheat is $7, what will the per-unit deficiency payment equal?
2. How do nonrecourse commodity loans work?
3. What are the effects of price supports?

Com m on M i s c o n c e p t i o n s
About Farmers’ Incomes

I t is a misconception that, if government policy assists farmers, then farmers must need assisting.
According to the 2006 Economic Report of the President, “Fifty years ago, average household
income for the farm population was approximately half that of the general population. Today,
however, the average farm household tends to be better off than the average American household;
in 2004, farm households earned about 35 percent more than the U.S. average household income.”
Also, according to a Department of Agriculture report, “On average, farm households have higher
incomes, greater wealth, and lower consumption expenditures than all U.S. households.” Also, in
2008, the Department of Agriculture estimated that the average household income for farmers was
$89,434, well above the national average.

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 “WHY DON’T FARMERS AGREE TO CUT BACK OUTPUT?”

Student:
In the first part of the chapter we learned that a rise in agricultural
productivity could actually work against the best interests of farmers.
In other words, if agricultural productivity rises, the supply curve of
agricultural goods shifts to the right, prices fall, and, if the demand
for these goods is inelastic, lower prices bring lower total revenue for
farmers. Why, then, don’t farmers simply get together and decide to
become less productive?
as possible to sell when other farmers lower their productivity, supply
falls, and price rises.
Student:
I see. And what you are implying is that if this one farmer can cheat on
the agreement with other farmers, so can other farmers. In the end, no
one lowers his productivity, the supply curve does not shift to the left,
and price does not rise.

Instructor: Instructor:
It would be quite a task for farmers to get together and decide on That’s right.
this. But let’s for a minute suppose that they could do this. Somehow
Points to Remember
all farmers meet in Topeka, Kansas, on a given day and decide to be
less productive. We’d then have to ask if they would all abide by their 1. If demand for agricultural goods is inelastic, farmers can benefit
by lowering their productivity, thus shifting the supply curve of
agreement to be less productive.
agricultural products to the left, and raising price.

Student: 2. Farmers would have a difficult (if not impossible) time of holding
to an agreement to lower productivity. Each farmer is better off if
Why wouldn’t they abide by their agreement? After all, doing so
he or she does not hold to the agreement while other farmers do
benefits them. Less productivity means that prices will rise, and, hold to it. In such a case, it’s likely that no one will hold to it.
assuming that the demand for their goods is inelastic, total revenue
will rise.

Instructor:
Look at things from the viewpoint of a single farmer. On the one hand
you know that if all farmers are less productive, price will rise. You like
the higher price, especially if demand for your product is inelastic. But
another side of you says that, if the price rises, you’d like to have as
much output as possible to sell. In other words, if the price of a bushel
of wheat rises from, say, $4 to $5, you’d prefer to have 10,000 bushels
to sell at the higher price than only 8,000 bushels.

Student:
Are you saying that an individual farmer has conflicting aims? On the
one hand he wants price to be higher, but on the other hand he wants
as much output to sell at the higher price?

Instructor:
That is exactly what I am saying. What an individual farmer is likely
to do is this. First, he will agree with other farmers that they need to
lower their productivity. He might even go along and say that this is
what he plans to do as long as everyone else does the same thing.
But then, when he gets back to his farm, he might choose not to
lower his productivity. Why? Because he will want as much output

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Farms and Farm Payments
D
o most farmers receive some kind of
government assistance? Are most farmers
today working on small farms or large farms?
Today in the United States, most farms are small, but they usually
produce only a small percentage of total agricultural output, and
they receive only a small share of agricultural subsidy payments. For
example, in 2004, there were approximately 1.4 million small farms,
529,000 intermediate farms, and 157,000 commercial or large
farms. The small farms together produced about 9 percent of the
total value of agricultural output, the intermediate farms produced
Chapter Summary
AGRICULTURE AND HIGH PRODUCTIVITY
• Productivity in the agricultural sector has increased at a
faster rate than productivity in the economy as a whole.
This increase has not always been a blessing for farmers
because when productivity increases, the supply curves for
their products shift rightward and price falls. Decreases in
price often lead to decreased revenues because the demand
for many farm products is inelastic.
AGRICULTURE AND INCOME INELASTICITY
• The demand for many farm products is income inelastic,
which means that quantity demanded changes by a smaller
percentage than income changes. When productivity is
high, the supply of farm products is likely to increase by
more than the demand for them. Once again, this combina-
tion puts downward pressure on price.
Key Terms and Concepts
Futures Contract Price Support
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19 percent, and the large farms produced 72 percent. The
small farms received 17 percent of the subsidy payments,
the intermediate farms received 32 percent, and the large
farms received 51 percent.
Not all farmers receive subsidy payments. In 2004, about
40 percent of U.S. farmers received payments. This is partly
because many farmers produce crops for which there is no
assistance.
AGRICULTURE AND PRICE INELASTICITY
• In addition to high productivity and income inelasticity,
which tend to put downward pressure on farm prices, the
demand for many agricultural goods is inelastic; that is,
falling price leads to falling total revenue (or gross farm
income). In addition, because demand is inelastic, shifts in
supply—which are commonplace in agriculture owing to
changes in weather conditions—bring about (sometimes)
large changes in price and total revenue. Such unexpected
large changes in price and total revenue increase the uncer-
tainties of farming.
GOVERNMENT ASSISTANCE TO FARMERS
• Government assists farmers with a variety of programs.
Some of these programs are price supports, acreage restric-
tion, crop restriction, nonrecourse commodity loans, pro-
duction flexibility contract payments, fixed direct payments,
countercyclical payments, and target prices.
Target Price
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 CHAPTER 21
Questions and Problems
1 What is the connection between inelastic demand and price
stability?
2 Why don’t all supply-restricting agricultural policies work
as intended?
3 How can good weather be desirable for an individual farmer
but not for farmers as a group?
4 How can a farmer protect himself against price variability
using a futures contract?
5 How do nonrecourse loans support crop prices?
6 Some people contend that the majority of Americans
realize that they subsidize farmers through various gov-
ernment programs, but they don’t mind doing so because
they know they are preserving a certain way of life. This
argument assumes that the United States wouldn’t be
Working with Numbers and Graphs
1 Using Exhibit 1, prove that total revenue at P1 is greater
than total revenue at P2.
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Agriculture: Problems, Policies, and Unintended Effects 483
the same—would in some way be diminished—without
family farms and that it is worth paying higher taxes and
prices to preserve them. What do you think of this argu-
ment? How would you go about determining how much
truth there is to it?
7 Do you think the number of farmers in the United States
will increase, decrease, or stay roughly the same during the
next 20 years? Why?
8 Because of strict limits on sugar imports, American consum-
ers pay higher prices for many of the foods and drinks they
buy that contain sugar. However, most consumers probably
do not know this. Moreover, even if they did know it, it is
unlikely that any one consumer would take the time and
effort to lobby against the limits. Why not?
2 If the demand for food were elastic, would bad weather
be better for farmers than good weather? Use a diagram to
explain your answer.
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