Question
Suppose the domestic demand and supply for corn intersects at p and suppose further that p also happens to be the world price for corn.
Suppose the domestic demand and supply for corn intersects at p and suppose further that p also happens to be the world price for corn. (Since the domestic price is equal to the world price, there is no need for this country to either import or export corn.) Assume throughout that income effects do not play a significant role in the analysis of the corn market. Suppose the domestic government imposes a price floor p that is greater than p and it is able to keep imports of corn from coming into the country. Suppose further that the government has committed to purchase the difference between what is supplied at the price floor and what is demanded. (a) Illustrate the disequilibrium shortage or surplus that results from the imposition of this price floor. (b) Illustrate the smallest possible deadweight loss in the absence of the government purchasing program as well as the deadweight loss if the government purchases the excess corn and then sells it at the world price p. (c) How would the deadweight loss change if the government found a way to give the corn it purchases to those consumers that place the highest value on it? (d) To avoid problems related to storing, destroying or shipping abroad the excess output bought by the government, the government proposes an alternative price support mechanism. It sets a support price p, farmers decide how much to grow and they sell all of their produce to consumers at the price p that clears the market. The government then gives a deficiency payment equal to the difference between the support price p and actual price p, p - p, for every unit sold so that farmers receive the entire support price on their entire crop. On a graph, illustrate the equilibrium price and quantity under this deficiency-payment support program as well as the welfare effects of this price support program
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