In an effort to "support" the price of some agricultural goods, the Department of Agriculture pays farmers a subsidy in cash for every acre that they leave unplanted. The Agriculture Department argues that the subsidy increases the "cost" of planting and that it will reduce supply and increase the price of competitively produced agricultural goods. Critics argue that because the subsidy is a payment to farmers, it will reduce costs and lead to lower prices. Which argument is correct? Explain

Question

Shamar Kennedy

Business

14 December, 22:24

In an effort to "support" the price of some agricultural goods, the Department of Agriculture pays farmers a subsidy in cash for every acre that they leave unplanted. The Agriculture Department argues that the subsidy increases the "cost" of planting and that it will reduce supply and increase the price of competitively produced agricultural goods. Critics argue that because the subsidy is a payment to farmers, it will reduce costs and lead to lower prices. Which argument is correct? Explain

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Ximena · Answer 1

The Agriculture Department argues that the subsidy increases the "cost" of planting and that it will reduce supply and increase the price of competitively produced agricultural goods.

Explanation:

The department is correct with the agreement that subsidies increase the cost of planting, as the subsidy will decrease with the decrease in area planted and this will increase the output available.

As the subsidy is paid for un-planted area it will be increasing cost, and decreasing quantity of output.

This is clearly true, as they are directly related and this will increase the prices as supply will be low and high demand.

This need to be regulated properly, as no subsidy will discourage farmers, but high subsidies will also discourage farmers.