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FOOD: INSIDE THE BYZANTINE WORLD OF

MILK PRICING

Group 3 | Sec. B
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New England
Upper Midwest

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BRIEF OVERVIEW 1996 Northeast Interstate Dairy Compact
To protect its local dairy farmers, a price floor
1930s Price Floor was set at 5% - 22% higher than the Eau Claire
Government set a bonus price
floor price since Now average Vermont farmer made $1000 more
dairy farmers had a month & New England shoppers to cumulatively
little market power pay $5 million more a month

1930 1960 1996 1997 (Now)

1960s Eau Claire Bonus 1997 Eau Claire Rule abolished


Eau Claire Bonus created a difference Federal judge threw out the Eau Claire Rule
between the base price of milk in Eau (pending appeal)
Claire and other regions[1] Lobbyists are forming regional pacts to
Instead, dairy farming started in these create compacts similar to New England
other regions Number of dairy farm operators in US has
Megafarms sprang up & scientific dropped 44% in the past decade
advancements made cross-country shipping
cheaper 3
AN IDEAL MARKET

Supply
Price ($ per Gallon)

P = Equilibrium Price
Q = Equilibrium Quantity
b E E = Point of Equilibrium
P
c Area(abc) = Buyers Surplus
Area(bcd) = Sellers Surplus

Demand
d

Q
Quantity (Gallons per year)

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SITUATION OF MARKET IN 1930s
(after implementation of Price Floor)

h
Excess Supply

Supply
PF a
b
P = Equilibrium Price
Q = Equilibrium Quantity
Price ($ per Gallon)

E = Point of Equilibrium
E PF = Price Floor
P c e
d QF = Quantity at Floor Price
Area(abh) = Buyers Surplus
Area(abfg) = Sellers Surplus
f Area(abec) = Buyers
Surplus Loss
Area(def) = Sellers Surplus
g Loss
Demand Area(bef) = Deadweight Loss

QF Q
Quantity (Gallons per year)

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SITUATION OF US MILK MARKETS IN 1960s (In places far from the Milk Belt)
(after the implementation of EAU CLAIRE Rule)

a Excess Supply
S1
S2
PF P = Equilibrium Price at S1
b c Q = Equilibrium Quantity at
Price ($ per Gallons)

S1
E = Point of Equilibrium
P = Equilibrium Price at S2
P d i h E
Q = Equilibrium Quantity at
E S2
P
E = New Point of
e
k Equilibrium
PF = Price Floor
j QF = Quantity at Floor Price
g
Area(abc) = Buyers Surplus
Demand Area(bcgf) = Sellers Surplus
f Area(jkgf) = Sellers Surplus
Gain
QF Q Q Area(ceg) = Deadweight
Loss
Quantity (Gallons per year) Area(kheg) = Sellers
Surplus Loss 6
SITUATION OF NEW ENGLAND MARKET IN 1996

a
S1 S2
c
PF b P = Equilibrium Price at S1
d Q = Equilibrium Quantity at
e
PF S1
f
Price ($ per Gallons)

E = Point of Equilibrium
P = Equilibrium Price at S2
E Q = Equilibrium Quantity at
P S2
E E = New Point of
P h Equilibrium
PF = Price Floor
QF = Quantity at Floor Price
g PF = New Price Floor
QF = Quantity at New Floor
i
j Demand Price
S1 = Supply Curve (1930s)
S2 = Supply Curve (1960s)
QF Q Q Area(abc) = Buyers Surplus
Area(bcij) = Sellers Surplus
Quantity (Gallons per year) Area(bced) = Sellers
Surplus Gain
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Area(chi) = Deadweight Loss
INEFFICIENCIES DUE TO GOVERNMENT INTERFERENCE

Part of buyers surplus was eaten up by sellers.


Due to the price floor, total surplus was reduced and there was dead weight loss.
Many inefficient farmers were able to enter the market because of the rise in price.
Due to the higher price, supply was more than quantity demanded leading to excess
supply.
This led to many farmers from the milk belt shutting down their farms.
Administration of the Eau Claire Rule involved a staff of about 500 at the agriculture
department and cost consumers $1.7 billion some years.
Cartels were formed which prevented the market from acting freely.

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WHAT COULD THE GOVERNMENT HAVE DONE ABOUT THIS
SITUATION?

Government could purchase the excess milk and supply it to the consumers.
Government could strictly enforce the price floor and ignore the waste of surplus. This
would benefit suppliers who could manage to sell and the rest would lose out.
Government could control how much milk is produced. To prevent too many suppliers
from entering the market, the government could pay suppliers not to produce rather
than purchasing the excess supply.
Government could lower the price and pay the difference to the farmers in the form of
subsidies.

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KEY TAKEAWAYS -

Government interference results in inefficiencies and loss of overall economic surplus.


Buyers suffer loss of surplus and are forced to pay higher prices
Inefficient sellers are able to enter the market due to the price floor
Due to high prices, sellers are unable to sell their entire supply and are eventually
forced out of the market
Excess supply leads to wastage

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REFERENCES

Allen, W.B, Weigelt, K, Doherty, N, Mansfield, E (2010), Managerial Economics, New York: W.W
Norton & Company
Png, I. (2016), Managerial Economics, New York: Routledge Taylor & Francis Group
Rubinfeld, D. L., Pinkyck R. S. (2005) Microeconomics, New Jersy: Prentice Halls
Taylor, B. (2005). Price Floor. Retrieved from
http://economics.fundamentalfinance.com/micro_price-floor.php
Frasca, R. R. (2007). The Eau Claire Bouns. Retrieved from
http://academic.udayton.edu/PMIC/Exercises/Exer12-1.htm

Image Source

Forbes, S. (2014).Give a Cow its Due.


Retrieved July 16, 2017 fromhttp://modernfarmer.com/2014/09/inner-life-cows

USA Map with Capital (2013)


Retrieved July 16, 2017 fromhttps://www.mapsofworld.com/usa/usa-state-and-capital-map.html
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