American rice producers have extremely high production costs, due to some structural problems. Therefore, if not supported by the government, they will not be able to compete with foreign producers. Analyze two supportive policies intended to maintain domestic rice producers: (1) a per-pound subsidy to farmers for each pound of rice produced, or (2) a per-pound tare on imported rice. Assume that the world market price is below the domestic equilibrium price and in either policy government only wishes to make sure that producers will receive this price. Illustrate with supply-and-demand diagrams the equilibrium price and quantity, domestic rice production, government revenue or decit, and deadweight loss from each policy.
Which policy is the government likely to prefer? Which policy are farmers likely to prefer?