HW2 - Part 1: Government Market Interventions
[10 participation points] European farmers hold large political power and influence policy to get government protection. Consider the effect of a price floor that increases the free-market price on agricultural products under two scenarios: (1) Elastic supply, and (2) inelastic supply. Analyze and draw the effects of a price floor on consumer and producer surplus in each case. In which case is the transfer of surplus to farmers larger? In which case is the deadweight loss larger? Do you think agricultural products have a high or low supply elasticity?
[5 participation points] Now focus on the case of inelastic supply and instead of a price floor, consider the effects of a subsidy. Would farmers prefer a subsidy or a price floor? What about consumers?
HW2-Part1: Government Market Interventions
1. [10 participation points] European farmers hold large political power and influence policy to get government protection. Consider the effect of a price floor that increases the free-market price on agricultural products under two scenarios: (1) Elastic supply, and (2) inelastic supply. Analyze and draw the effects of a price floor on consumer and producer surplus in each case. In which case is the transfer of surplus to farmers larger? In which case is the deadweight loss larger? Do you think agricultural products have a high or low supply elasticity?
2. [5 participation points] Now focus on the case of inelastic supply and instead of a price floor, consider the effects of a subsidy. Would farmers prefer a subsidy or a price floor? What about consumers?