Why do we pay farm subsidies and what do they do to the prices of certain goods?
In: Economics
The most reasonable justification for farm subsidies is that it encourages an overproduction of food. Normally in economics, overproduction is a bad thing because producers take a loss on some of their product. But in the case of farming when production can be affected by yearly weather differences, having farmers aim for a market clearing production level only to fall short due to the weather would lead to a food shortage. In this market, a food shortage is way, way worse than overproduction, so the government pays a subsidy to encourage overproduction. This has the effect of keeping the price low and the people fed.
A more cynical case could be made that these farm subsidies are generally unnecessary in the United States, since much of our farming is done by a handful of very large companies. Since these companies farm over a vast range of territory, the risk of under or overproduction due to yearly variation in weather mostly evens out, so this subsidy looks more like a corporate hand out
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