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Occupational Health and Safety, Canadian Edition

15th Edition
by David L. Goetsch, University of West Florida and Oskaloosa-Walton Eugene Ozon, Algonquin College
1035 Solutions 49 Chapters 1462 Studied ISBN: 0133450244 Computer Science 5 (1)

Chapters 20: DQ 10

10. What are the effects of farm subsidies such as those of the United States and the European Union on (a) domestic-agricultural prices, (b) world agricultural prices, and (c) the international allocation of agricultural resources?


Step-By-Step Solution

10. What are the effects of farm subsidies such as those of the United States and the European Union on (a) domestic-agricultural prices, (b) world agricultural prices, and (c) the international allocation of agricultural resources?

Answer: Domestic agricultural prices are obviously higher than they would be in the absence of subsidies. The reason for the subsidies in the first place is that market equilibrium prices were lower than farmers believed they should be. Without subsidies farm product prices would initially fall to the lower equilibrium price. It is also argued that subsidies protect inefficient farmers, and without such programs only the efficient, low‑cost producers would remain. To the extent that this is true, farm prices would remain lower than the current support prices that exist for many products.

The situation on world markets is somewhat more complex because the European Union (EU) subsidizes its exports of agricultural products on world markets. Thus, the supply of these products is greater than it would be under competitive market conditions, and the world prices of many products are depressed.

There is an international misallocation of agricultural resources. Wherever there is a farm subsidy program without programs restricting supply, there will be an expansion of production in response to the above‑market price supported. Without such restrictions, continuing farm subsidies would mean that more than the efficient amount of resources is devoted to production of subsidized products. The over-allocation occurs both within and among countries. Farmers in countries that might more efficiently import agricultural products and use these resources more productively in other pursuits are encouraged to remain in agriculture as long as their governments subsidize this type of production. Meanwhile, farmers in countries without farm programs face artificially depressed world market prices and find it is not profitable to raise farm products for export. In a free‑market world, they might be more efficient producers than their subsidized neighbors.


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