Posted by Cecilia on .
Suppose the U.S government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. It therefore implements a price floor of $1 per pint by buying surplus milk until the market price is $1 per pint. Use the accompanying diagram to answer following questions.
a) How much surplus milk will be produced as a result of this policy?
At a price of $1.10, producers would like to sell 800 million pints but consumers only want 600 million pints, there is a surplus of 200 million pints.
b) What will be the cost to the government of this policy?
c) Since milk is an important source of protein and calcium, the government decides to provide the surplus milk it purchases to elementary schools at a price of only $0.60 per pint. Assume that schools will buy any amount of milk available at this low price. But parents now reduce their purchases of milk at any price by 50 million pints per year because they know their children are getting milk at school. How much will the dairy program now cost the government?
d) Give two examples of inefficiencies arising from wasted resources that are likely to result from this policy. What is the missed opportunity in each