During the year 1987, agricultural economists have analyzed the performance of various income-supporting farms programs ( e.g. Cochrane and Ryan, Brandow). Many problems were discovered which included market failure, low farm income and constant instability. Empirical research which was done has indicated that an increase in price instability or income instability tend to decrease aggregate supply ( e.g. Just, Lin, Hurt and Garcia) and increase marketing margins. However, no previous research has analyzed empirically the impact this could have on the U.S agriculture In terms of a market equilibrium. An approach like this would improve their understanding on reactions between market participants and how their actions would affect the market. For example, if a reduction in risk increases supply and decreases the marketing margin, what is the net impact on farm prices? This example shows the importance of analyzing the risk for both parties, producers and marketing firms.
Ever since then, market equilibrium can be achieved in the agriculture sector through the use of price floors. A price floor is a regulation whereby the government does not allow a product to be sold below a minimum price. Price floors are set normally at the minimum wage – the minimum price that can be paid for labor. Price floors are usually used to protect producers of unproductive sectors such as in agriculture in order to help farmers.
Sources: http://www.jstor.org/discover/10.2307/1242182?uid=3738672&uid=2129&uid=2&uid=70&uid=4&sid=21102435849851
Written by: Justin Peterson Lo Kin Yew
ID: 0315377
