If the bill had not been extended, subsidies to dairy farms would have reverted to 1949 levels. One report on CBS Evening News suggested that not extending the farm bill could increase milk prices to over $7 per gallon.
Questions:
A. In most US agricultural markets, a surplus, or excess supply, often exists because of price supports that keep prices artificially high. If a surplus exists in the market for milk due to price supports through subsidies, why wouldn't the price of milk fall if the subsidies had been decreased? (Use the demand/supply model to explain.)
B. Because government subsidies are paid with tax dollars and tax dollars are often used to purchase any surplus milk, consumers effectively pay more than the retail price per gallon of milk when considering the amount they contribute to dairy farmers through taxes. Given this, do you think consumers benefit from these subsidies in the form of lower prices or should subsidies be eliminated and simply let the retail price rise?