Homework Help

Insurance can help a protect a farmer from a crop loss that is completely out of their...

user profile pic

sj83 | (Level 1) Valedictorian

Posted July 27, 2013 at 10:49 PM via web

dislike 2 like

Insurance can help a protect a farmer from a crop loss that is completely out of their control.  Weather or natural events are difficult to predict so it is a benefit for a farmer to have something like that in place, especially because it could undo everything they have worked for during the year.  How does insurance affect consumers at the market?  Does it have any impact on prices if a crop has been lost?

1 Answer | Add Yours

user profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted July 27, 2013 at 11:55 PM (Answer #1)

dislike 1 like

In theory, crop insurance should affect consumers in two ways.  However, in the real world it is not at all clear that these effects are actually seen.

In theory, the farmers should pass the price of crop insurance on to their customers.  Every year, they should add the price of the insurance premiums to the price of the crops.  By contrast, when crops fail, the insurance should help the consumers.  The insurance should keep farmers from losing too much money.  This would mean that they would not need to raise their prices as high in the next year after the loss of the crop.  Thus, insurance would increase prices on a regular basis but prevent them from getting too high in the aftermath of a lost crop.

However, it is not at all clear that this actually happens in real life.  The farmers are, essentially, price takers.  They cannot really have much influence on the prices that they get for their crops.  Therefore, the price is not really affected by their purchase of crop insurance.

So, crop insurance should theoretically impact consumers, but it probably does not actually have much of an effect.

Join to answer this question

Join a community of thousands of dedicated teachers and students.

Join eNotes