Subsidy

Yet another way to keep farm prices high without an excess supply is to rely on subsidy. In general, a subsidy is a direct payment from the government to a private person. In the case of farm subsidies, the payment is based on to the amount produced. Here is an illustration:

Figure 8: Subsidy

In the figure, the whole production of Q₂ is sold. The government subsidy pays the difference between the price at which this amount can be sold (the lower orange horizontal line) and the support price received by the farmers. There is no excess supply, no destruction of crops, and no storage. The cost to the government is the area of the orange-stippled rectangle.

Despite this substantial cost, subsidies have probably been, all in all, the least troublesome of farm price support policies. Most farm policies in advanced countries have been based on some combination of subsidies and buying up the surplus -- or, in fact, subsidies disguised as buying the surplus. Many such subsidies continue to be paid today in the industrialized countries, including the U. S. A.

Summary on the "Farm Problem"