Question

For the US target price program: Assuming the target price is set above the expected market price, other things equal, we would expect that

a) expected price received by farmers would: Increase, Decrease, It Depends

b) expected quantity produced by farmers would: Increase, Decrease, It Depends

c) expected price paid by consumers would: Increase, Decrease, It Depends

d) expected quantity bought by consumers would: Increase, Decrease, It Depends

e) the target price program is “market oriented”: Yes, No, It Depends

f) Explain your rationale for your answer to (e) above.

Answer 1

To explain in simple words, the US target price program is an example of a price floor, to benefit the farmers.

It is set above the free market price, and the farmers are entitled to receive this higher price. Thus, it assures the farmers of a certain price, and gives them the incentive to produce.

The government pays the difference to the farmer, if free market prices are lower than target. If free market prices are higher, no intervention is needed.

Now, in the given case, target price is set above the free market level. Based on this understanding, the following answers are explained:

a) expected price received by farmers would:

Increase - the government pays the farmers any price difference above the free market price

b) expected quantity produced by farmers would:

Increase - because the farmers have an incentive to sell more at a higher price

c) expected price paid by consumers would:

Increase - because now consumers end up paying more than the market price

d) expected quantity bought by consumers would:

Decrease - due to the higher price

e) the target price program is “market oriented”:

It depends

This program is only applicable when market prices are quite low, and the the target price set by the government is quite high.

When market prices are high, the program will not interfere. Prices will be left to the market.

f) Explain your rationale for your answer to (e) above.

As explained in e), the program depends on the difference between target prices and market prices. When market prices are already higher than target, there is no need of this program. However, it still needs to be in place for years where market prices are quite low.