Question: The government of the U.S. like many other governments around the world provides dairy farmers with a subsidy. This is to support those farmers who can not compete and stay in business at the existing market prices. The subsidy comes thought the Government guaranteeing the product price at a level higher than the market equilibrium price. We learned about this common practice in our class as a price protection through creating a price floor above the existing market price. Based on what you’ve learn in the class answer the following questions.

1. Draw the relevant diagram and show the government subsidy graphically.
2. Explain the income distribution effect of this policy by indicate farmers’ gain and the loss to consumers and/or taxpayers.
3. Explain the impact of this policy of economic efficiency and resource allocation. Provide reasons for why most governments around the world follow a similar policy in their own countries.
4. Is there any economic justification for supporting farmers?
5. Argue in writing as well as present graphically, the economic (using market forces) steps that a government can take to resolve this problem without bringing a massive bankruptcy to many needy farmers.

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