Assignment-1

You are the economist: Rigging the Market for milk

Analyze the issue

1. Draw a supply and demand graph to illustrate the problem described in the case study, and
prescribe your own solution.
Ans:
The problem that the case has illustrated is simply the overproduction of dairy
products and how the federal government can do about the dairy price support program.
The government agreed to buy storable products and set a minimum price for milk. This has
created more problem because the dairy farmers are encouraged to increase the production.
There is a condition of surplus in the market due to over supply of the dairy products.

This situation can be explained by the following graph:

Y
Demand and supply curve

Surplus S

P1
Price of the
dairy product P

Quantity of the dairy product

In the above graph X axis represents the quantity of the dairy product and Y axis
represents the price. The downward sloping curve D is the demand curve and upward sloping S
is the supply curve. The given graph shows the surplus in the market due to over production of
dairy product by increasing the quantity supply of the dairy product from Q to Q1. At this
condition the price has increased from P to P1. The solution that can be taken for this problem
can be:
i. The government should not buy all the excess product so that the producer will be left
with more product and they will have to decrease the production.
 ii. Another solution can be imposing more tax on production so that the cost of production
for the producers increases and they relatively decrease the production.
iii. One solution can be selling those storable products that the government buys, in other
countries i.e. exporting the A grade milk products. This will result the production to be
the same and increasing country's revenue and national income.

2. Which proposal do you think best serves the interests of small dairy farmers?
Ans:
In my view, the first proposal suits the best for the interests of the small dairy farmers.
The cost of production of small dairy farmers is comparatively less in compared to the big dairy
farmers. Although freezing the current price support level dismay the farmers, it suits the small
dairy farmers because their expenses for feed, electricity, and other resources are less due to
which they won't be much affected by the rise in price of those expenses.

3. Which proposal do you think best serves the interest of consumers? Why?
Ans:
I think for the consumers the second proposal serves the best. It is because market is a
place where pricing shouldn't be fixed by any external bodies i.e. market itself fixes a suitable
price that satisfies both the consumer and the producer. Even though the farmer would suffer
some bad years, the market will be efficient with the elimination of the price support. We know
that at this situation provided in the case, the supply exceeds demand and the price is higher.
When there is less demand than supply, an invisible hand pushes the prices level to the
equilibrium price which both the producer and the consumer accepts. Hence, the elimination of
the price support best serves the consumers.

4. Which proposal do you think best serves the interest of a member of Congress? Why?
Ans:
The member of Congress is the one who advocates changes in the price support
programs. For the congress, I think the third proposal serves the best. Charging the dairy farmers
tax of 50 cents for every 100 pounds of milk will increase their cost of production due to which
they get discouraged and decrease the production resulting no any situation for the federal
government to buy the dairy products. Thus, imposing the tax to the producers leads to deduction
of the production and the increase in government revenue through the tax the producer(farmers)
pay.

Submitted by:
Bandana Shrestha
Roll No: 197096
Section: A