Evaluate this statement:
Subsidy programs are likely to have a number of secondary effects in addition to the direct effect on dairy prices. What impact do you suppose farm subsidies are likely to have on the following?
1. Housing prices
2. Technological change in the dairy industry
3. The price of dairy product subsitutes
The United States Department of Agriculture (USDA) supports a number of programs for agricultural producers. For the dairy industry, programs such as Market Loss Program, Milk Income Loss Contract Program, Dairy Product Price Support Program, Milk marketing orders, Livestock Compensation Program, etc. were or are in place. The direct effect of these subsidies is exhibited in higher incomes for farmers. The taxpayers and consumers pay for these subsidies in terms of higher prices of the commodity in the market and administrative/transport expenses incurred by the subsidy programs.
Several secondary effects are also likely as a result of farm subsidies. Higher support price causes higher production of the commodity by the farmers, which is typically brought about by the application of better technology. Hence, technological changes in the dairy industry are supported by the farmers as a result of the subsidy program.
It has also been observed that dairy cartels profit from specialized resources during the subsidy regime. Since the higher support price program (and other subsidies) will provide an incentive for higher production, specialized resources will be in higher demand. These include land, skilled staff, dairy cows and equipment, etc. Thus the price of land will increase as a result of subsidy programs and this will push up housing prices. Another reason, apart from cartel profiteering, is the greater purchasing power of the farmers due to subsidy programs, which will enable their buying of houses at higher prices.
As the price of dairy products increase, the demand for substitutes will also rise, which will cause an increase in the price of the substitutes. An example is the increase in the price of sugar alternatives due to the higher price of sugar (because of the subsidies).
Thus, it has been estimated that such subsidy programs benefit only the rich farmers and put an additional burden on tax-payers and consumers.
Hope this helps.