Policy Pennings: Price extremes and market distortions

Free market and libertarian economists emphatically proclaim that supply management programs distort markets and thereby cause misallocation of economic resources. We agree.

But the relevant policy question is not whether distortion occurs. The question is “compared to what.”

Economists routinely use the perfectly competitive model as the reference point. As surprising as it may seem, that standard is lacking in this case because key assumptions of the perfectly competitive model do not characterize agriculture.

In fact, the lack of congruence between the characteristics of agriculture and the assumptions of the perfectly completive model is the economic reason for the existence of farm programs.

To us the most appropriate standard for considering the resource-use and general economic efficiency of a proposed farm program is to compare it with the dominant farm program currently in use.

The general philosophy of recent farm programs is to allow prices to go as high and as low as they want, with direct payments used to partially offset “low” prices. Given the characteristics of agriculture, the price highs — which are almost always caused by external events — and subsequent price lows have been indeed extreme, very extreme.

Those extremes are major distortions away from what we might think of as a long-term cost of producing the product. This means that during periods of extremely high prices additional resources are brought into agriculture in the United States and elsewhere as if those extremely high prices were going to continue for the foreseeable future.

Livestock operations and other consumers of the major crops have their markets distorted, as well, since they must pay excessively high prices for grains. Consumers face distorted markets characterized by reduced availability and high prices of meat and other food products.

https://www.agrinews-pubs.com/opinion/2020/12/19/policy-pennings-price-extremes-and-market-distortions/

Blah Blah

"Price extremes" are not market distortions. In a truly free market, futures markets would be used to hedge against the wild price movements.
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Policy Pennings: Price extremes and market distortions PgkowJT

Policy Pennings: Price extremes and market distortions PgkowJT

Policy Pennings: Price extremes and market distortions

Policy Pennings: Price extremes and market distortions

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