Question

to maintain price floors on milk, the u.s. government has at times bought out and destroyed entire dairy herds from dairy farmers. whats the economic logic of these actions?

Answer 1

Price floor is provided to the producers of a particular good or service in order to increase their revenue to a respectable level. Market, without the intervention of the government, will determine the market price of a good based on the market forces of demand and supply. Such a price can be too low for some goods. government intervene in the market and fix the price of these products way higher than the equilibrium price.

Because the market price is greater than the equilibrium price under price floor there is a surplus of good manufactured. Milk is one such product. This is surplus of unsold milk is a cause of concern for the producers because they suffer losses when even at a higher than market price they are unable to sell their product. In order to compensate them for their losses government attempts to purchase the entire surplus.

However since there is no demand for such surplus government has to destroy it. This represents of wastage of resource and an efficiency loss because price floor is preventing the market from clearing and government is using the taxpayers money to subsidise the producers of milk. This purchase of surplus is therefore inefficient..