Suppose the government wants to increase the price of a specific agricultural product. Discuss the welfare effects of four possible policies: price floor, price support, production quota and voluntary production reduction. Which policy is least efficient? Discuss the differences in the benefits to farmers and the cost to the government.
What will be an ideal response?
All four policies create a deadweight loss. The price support program is the least efficient because some of the good is unused and goes to waste. Each policy reduces consumer surplus by the same amount as compared to the no intervention case. Producer surplus and the cost to the government are greatest under the voluntary production reduction and price support programs.
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