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Impact of Target Prices and Payment Limits on the Supply Function

C. Richard Shumway, Edward G. Smith and James W. Richardson
Review of Agricultural Economics
Vol. 17, No. 2 (May, 1995), pp. 185-191
Stable URL: http://www.jstor.org/stable/1349731
Page Count: 7
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Impact of Target Prices and Payment Limits on the Supply Function
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Abstract

Payment limitations have been included in each farm bill since 1970. Due to loopholes, they have been ineffective in restricting direct payments to producers. Nevertheless, considerable interest continues for legislation to effectively cap program payments, and proposals are expected to surface in the 1995 farm bill debate. Because of the ineffectiveness of past legislation, the impact of payment limits on supply response has not been addressed previously. However, past failures do not preclude the possibility of new legislation being effective in the future. This article develops a simple graphical model of supply impacts that would be caused by legislation that effectively limits farm program payments to individual producers. The analysis contrasts the supply curve under government intervention with that under a free market. The impact on the "intervention" supply curve from an effective payment limitation is assessed, both for firms stratified by size and for the aggregate. Consideration is also given to the effects of alternative loan rates, target prices, acreage reduction provisions, and types of government payments subject to limitation. The analysis both benefits from and is limited by its simplicity. Its graphical approach makes it accessible to all readers. However, it lacks the formality of mathematical rigor, and no empirical analysis is included. Despite these limitations, it is clearly determined that an appropriately imposed payment limit could shift portions of the aggregate supply curve to the left and could be effective as a supply control mechanism. In addition, even if the market supply curve is linear, an effective payment limitation would introduce several kinks and nonlinearities into the effective supply curve. Hypotheses are also generated that will be relevant for subsequent empirical testing, one of which provides a possible explanation why some firms move in and out of farm programs.

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