Price Floors and Ceilings in the Dairy Industry - Research Paper Example

? Section/# Price Floors and Ceilings in the Dairy Industry The following analysis will consider price floors and ceilings within the dairy industry in the United States. Through such analysis, it is the hope and author that the reader will come to a more profound level of understanding with respect to the way in which these mechanisms operate to constrain and define supply and demand within the system. Whereas it may be convenient to assume that perfect competition exists within many markets around the world, the fact of the matter is that governments often provide subsidies and encourage price floors and/or ceilings as a manner of ensuring the domestic production capability of a given industry or enterprise. Oftentimes, this is done as a means of ensuring that the domestic production capability will remain constant; regardless of the shifts and changes in supply and demand that are evidenced as a function of a true capital market. For purposes of this brief analysis, the author will focus upon the dairy industry in the existence up price floors and ceilings that are represented throughout. Through such an examination, it is the hope of this author that the reader will come to a more full and complete understanding of the means by which these price floors and ceilings work to keep something of a static market and prices resiliently unchanged; seemingly regardless of how the market might move at any given time. The obvious rationale for these price floors and ceilings is with respect to the fact that individuals within society, oftentimes the most vulnerable, will not be in danger of being unable to afford many of the common nutritional components of a healthy lifestyle. Conversely, these price floors and ceilings exist as a way of ensuring that producers will not choose to leave the market and a relatively static level of production capability will be exhibited; due to the fact that producers are assured the fact that they will not make below a given level of profit upon each gallon of milk produced. Firstly, with regards to the social welfare theory that is aptly represented within this particular case, the price ceiling that exists denotes the fact that the individual consumer within the economy will not be expected to pay more than a given amount for a gallon of milk. This has a powerful impact upon the way in which the domestic economy operates due to the fact that a litany of different products derive their ultimate price based upon the dairy market. Whereas milk itself is the primary complement, cheese, butter, protein, way, and a litany of other substances and food products are all derived from the primary milk that exists within the dairy market itself. As such, by creating a price ceiling, secondary and tertiary producers are also given a level of assurance that the cost of production for their individual commodities will not fluctuate greatly from one period of time to the next (Dairy Industry, 2004). This ultimately serves as a type of insurance through which different food producers can rely upon the fact that even though demand for products might change, the supply and price of the compound and goods which are required to produce a given food substance are likely to remain close to if not exactly the same price as they are within the current market. Comparatively, the existence of a price ceiling within the dairy industry denotes a level of social welfare with regards to the consumer; however, a level of subsidization and ultimate benefit also exists within this same market when one considers the price floors that exist. The price floors that exists within the dairy market are ultimately a means of assuring the producer that regardless of what shifts market takes, the producer will still be guaranteed a minimum price for each gallon of milk that they produce. This assurance allows the producers to differentiate their industry and develop in a way that they might otherwise not; if they were more concerned with the continual shifts and supply and demand and the manner through which they should differentiate their industries accordingly (Warden, 2003). However, due to the fact that this provides the producer with a level of insurance concerning the way in which their industry will continue to evolve and be evidenced within the future, these producers feel a greater degree of liberty with regards to the manner in which they can continue to produce the product and differentiate their infrastructure to represent the realities of a fairly static market. Whereas the preceding analysis has been rather specific with regards to the way in which the price ceilings and price floors of the dairy industry operate, it also must be understood how these mechanisms that govern such a process are utilized. Likewise, with regards to the price ceiling, this concept is simplistic enough. Ultimately, the producer is not allowed to sell a gallon of milk for a higher price than a given set standard that the government puts forward. Comparatively, a price floor is something of a more complex constraint due to the fact that in the event that in excess is evidenced within the market, i it is then incumbent upon the government to purchase this excess at the price floor price; thereby reducing the overall supply that exists within the economy and driving up the price accordingly. Naturally, the raw material that is purchased by the government at this price floor is ultimately not thrown away (Foltz, 2004). Rather, the United States Department of Agriculture utilizes this excess milk as a means of serving many of the government programs that exists throughout the nation. As has been noted previously throughout this course, intervention within an economy, regardless of its merit and/or hopes of creating efficacy creates a level of deadweight loss. This deadweight loss is naturally found with respect to the fact that the dairy industry within the United States, and indeed elsewhere throughout the world in regions which subsidization and/or price floors or ceilings exist, is ultimately much less competitive than it could be. Even though a tangential benefit is represented to the consumer with respect to the fact that a somewhat static price exists for milk and dairy products, when one views the economic graph of the supply and demand curve and considers the deadweight loss and the total size of this differential within the price floor and ceiling model, it becomes painfully evident that the potential utility of the consumer is much less within this model as compared to the totally free market system that might otherwise exists. References Dairy Industry: Information on Milk Prices, Factors Affecting Prices, and Dairy Policy Options: GAO-05-50. (2004). GAO Reports, 1. Foltz, J. D. (2004). Entry, Exit, and Farm Size: Assessing an Experiment in Dairy Price Policy. American Journal Of Agricultural Economics, 86(3), 594-604. doi:10.1111/j.0002-9092.2004.00603.x Warden, C. (2003). Why you pay more for less food. Consumers' Research Magazine, 76(4), 15. Read More