Farmers’ Subsidies: How Incentives Affect the Market

By: Katie Schaefer-Afternoon SS Honorbound

Economists define incentives as what motivates people to do something, while perverse incentives are “the inadvertent incentives that can be created when we set out to do something completely different”[1].  This is basically when a good intention, or incentive, goes wrong.  One example of incentives is when the government hands farmers subsidies, but does this help or hurt the market?  Through the incentives for the farmers and the American people, the government displays how incentives affect what happens in the market.

The government hands out subsidies in order to help the American people with their business, whether it be growing produce or making cheese.  The government first started to give out subsides in the 1920’s, and they are still in effect today[2].  They first started to spend 5 million dollars on these subsides, but nowadays these subsides are costing taxpayers 20 billion dollars a year[3].  Since it is costing taxpayers billions of dollars a year, what exactly is happening to the money going into these farms?  Well, the money is going nowhere because farmers are not growing any crops, or the farmers are putting these crops in storage because the farmers end up over producing the crops.  When they put the crops in storage, the crops go bad because the farmers end up not selling them.  So if the crops and money end up going to waste, why does the government continue to hand out subsides?  One word: politics.

Politicians strive to win over every voter in order to win elections, so they promise to have the government add more subsidies to the agriculture so that they can win over the farmers’ vote.  They convince the farmers to vote for them and promise to pass more bills to benefit the farmers.  When these bills do not get passed, farmers became “loud and organized enough to punish lawmakers who vote against a farm bill”[4].  It seems to be that no matter what the government does, the farmers take action if the government does not do what would benefit the farmers.  Many politicians, who vote for the farm bills, fear that without the farmers’ approval, they will lose a lot of support and votes.  So, basically taxpayers are being cheated out of their money just so that a politician can have votes and a farmer can get more money for crops that will not even be produced or sold.  The question still is how does this effects the market? It changes supply and demand because the market is not determining the equilibrium.  This causes a negative effect on the market because consumers pay a higher price for agricultural goods and bare a larger tax burden for this tax policy.  If the goal of government is to maximize the effectiveness of the economy, then government should allow the market to move to equilibrium naturally.  Even though their incentive is good, the farmers’ subsides outcome has a negative affect not only on the economy, but the American consumers as a whole.

[1] Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: Norton, 2002.

[2] Edwards, Chris. “Agricultural Subsidies.” Downsizing the Federal Government. June 1, 2009. Accessed June 13, 2016. http://www.downsizinggovernment.org/agriculture/subsidies.

[3] “Milking Taxpayers.” The Economist. February 14, 2015. Accessed June 13, 2016. http://www.economist.com/news/united-states/21643191-crop-prices-fall-farmers-grow-subsidies-instead-milking-taxpayers.

[4] Ibid.

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