Monday, June 17, 2013

Interest group politics and how it affects the market price for sugar. Concentrated benefits and dispersed costs. THAT is how you lobby.

Here is an excellent example of government intervention in the market place to achieve a specific policy goal.  The goal is to protect sugar growers from projected lower prices due to a bumper crop of sugar this growing season.  

The U.S. Department of Agriculture plans to buy sugar from domestic growers, the government's first direct intervention in the nation's sugar market in 13 years. 
The move is aimed at helping to whittle down a surplus that has driven prices to four-year lows and is threatening to spark a wave of defaults on almost $700 million of government loans.
Producers took out loans guaranteed by the Federal Govt to finance the planting season.  Repayment of the loans was predicated on the anticipated market price at the time the sugar would be sold.  Because of the increase in supply, the price is expected to decrease well below the repayment terms. This means the growers will not have adequate revenues to pay back the loans.

Here is my graphical representation of what is going on.

The first graph shows the market in equilibrium.

 This graph shows the surplus at "Pe".  Due to the bumper crop of sugar, the quantity supplied at Pe is now Qs at Point "B".

 Quantity Supplied is greater than Quantity Demanded (Qs - Qd--the difference between "B" and "A") so there is a surplus of sugar at "Pe".

If left alone, the market supply curve would shift to the RIGHT ("Supply 1") and the market price would drop to "P1" at Point "C" as it is anticipated to do. 

 Not so fast. As the excerpt above suggests the Fed Govt is going to purchase that SURPLUS before it has a chance to impact the market place.

 "Supply 1" will shift back to the original position "Supply*".

And we will be back to where the market was before, assuming no other variables changes.

Benefits accrue to a relatively small faction of the economy, sugar growers.  The costs are dispersed among all consumers and businesses that use sugar as an input to make many other products.  

Subsidies distort market prices and provide an incentive to over-produce.  

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