The Power of the Market: Part 1

by Elaine Schwartz    •    Jul 27, 2011    •    855 Views

Maybe the market is more powerful than the Congress.

First, some history

Hoping that farmers would earn a living wage, in 1933, the U.S. government decided to subsidize crop prices. The goal was “parity,” a level of purchasing power that equaled what farmers could buy during their golden age, 1909-1914. To achieve parity farmers could receive a check that elevated market price to a target price.

Fast forward to 2011.

Farm income is soaring. Consequently, for many commodities, target prices are way below the market price. The target price of corn is $2.63 while its market price is near $7. For soybeans, $6 is the target and $13 the market. Translated into federal spending, farm subsidy totals are down by one half, from $22 billion to $11 billion.

Why? The power of the market. 

The Economic Lesson

Involving demand and supply, a market is a process that determines price and quantity.  For corn, you have ethanol, emerging economies, and China on the demand side. They are shoving corn’s demand curve to the right. No one person or government is making the decision. It is all about the interaction of many consumers and many producers.

So, when the Congress says it wants to cut spending, maybe the market can help.

An Economic Question: How would crop subsidies affect the quantity that the market supplies and demands?

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