Question

Gwernnv:nts often put special rules in place for to ensure that farmers do not go

I out of (as countries need food). One method commonly used is to with a subsidy (the opposite of a tax). Another option is to have the government implement a guaranteed minimum price for the product (ie. a price floor).

Explain the difference between these two concepts and their effect on the market (assume it is perfectty competitive) and individual firms (or farms here). Make sure to explain when a subsidy will be: more efficient than a guaranteed minimum price (think deadweight loss). Just as a reminder: because farmers are dependent on the weather, sometimes crop yields are good and sometimes crop yields are bad (your answer should include this information).

Answer 1

Governments across the world pay extra attention to the farmers and agriculture sector in their countries to ensure availability of food at stable prices to the people.

However, agriculture sector in general and crop yields in particular are dependent on favorable weather such as balanced rain for irrigation, etc. Therefore, in order to ensure sustainance of agriculture sector, government provides various types of support to the farmers.

Subsidy is a form of income and other forms of support such as transfer payments during adverse weather, monetary support to purchase agricultural goods and related equipments, etc. to help sustain farming activity in the country. As seen below, subsidy leads to an increase in supply of product.

On the other hand guaranteed minimum price is a certain minimum price fixed by the government for one or more than one agriculture product produced by the farmers. MSP ( Minimum support price ) is set at generally higher than market price for good or minimum cost of the good.

During adverse times such as irrational weather events which lead to fall in production of agricultural goods, subsidy is more efficient than MSP. Also, when farmers are not aware of market consitions and goods such as pesticides and their effectiveness, subsidy is more efficient than MSP.