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A group of Upper Midwest dairy farmers filed a suit in 1989 that led to Judge Doty's decision of revoking the Eau Claire
Rule in 1997
Resultantly, state lobbyists and lawmakers came together to save the local dairy farmers
Even before the revoke order came from court, New England had created a bill called Northeast Interstate
Dairy Compact to ensure that cheap Midwest milk doesn't affect local producers' prices by pricing all milk the
same
U.S. milk consumption has been stagnant over the past several years because such regulations does not guarantee
that demand increases
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BUYERS AND SELLERS PERSPECTIVE
Buyers Sellers
Benefits: Benefits:
1. Easier availability as more milk is being 1. Sellers outside Eau Claire received bonus for
produced being located away from the Milk Belt
2. Because of this incentive more dairy farmers
were encouraged to enter the business
Drawbacks:
Drawbacks: 1. Market became imperfect, as some suppliers
got geographic advantage
1. In spite of increase in supply of milk (an essential
commodity), price did not decrease
2. Unequal marginal cost for suppliers
2. Unequal marginal benefit for consumers
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DEMAND-SUPPLY RELATIONSHIP
Supply (1930s)
Supply (1930s)
($ per gallon)
Supply (1960s)
Price
Fig.1
Demand
Demand Demand
So, the sellers loss and buyers loss are together creating Deadweight Loss
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DEMAND-SUPPLY RELATIONSHIP
a b e f
Supply (1930s) Supply (1930s)
($ per gallon)
c d
P1 E1 E1
($ per gallon)
Supply (1960s) P1
Price
Supply (1960s)
Price
P2 e E2
P2
c E2
Fig. 4 - Initial g Fig. 5 - Expected
Situation Situation
Demand
Q1 Q2 e Demand
Quantity (Gallons per year) Q1 Q2
Quantity (Gallons per year)
a b Supply (1930s)
Pf c d E1 h
Dead-Weight Loss
($ per gallon)
P1 g
Legends
Price
Supply (1960s)
P2
f E2 Buyers surplus
Suppliers surplus
Fig. 6 - Current e Demand
Situation Q1 Q2 Qf
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Senator Patrick Leahy from Vermont inserted a provision for a six state milk-price compact into the 1996 farm
bill, i.e., Northeast Interstate Dairy Compact
Aim was to insure cheaper Midwest milk does not compete with the expensive New England variety by
pricing all milk at the same price
The price floor to farmers for beverage-grade milk was at $1.46 a gallon, a level that has been 5% to 22% higher
than the federally mandated minimum price
Due to this, each local diary farmer received $1000 more per month, thereby eating into the Buyers Surplus
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GOVERNMENTS INTERFERENCE
The Government intervention led to increased bureaucracy thereby bringing about inefficiencies in the
economy
Policies aimed at protecting interests of a certain group can adversely affect the economy in the long run. The Eau
Claire Rule and the Dairy Compacts helped inefficient farmers stay in business
Government pricing, if deemed necessary, should have a timely revaluation without the need for a court verdict
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REFERENCES
Managerial Economics by Ivan Png, 5th Edition (Special Indian Edition), Routledge
http://www.swlearning.com/economics/mankiw/principles2e/student/ch06/price.html
http://icetronauts.tripod.com/milk.htm
https://www.scribd.com/doc/113574738/Kilman-Byzantine-Pricing-of-Milk-1997
http://aic.ucdavis.edu/research1/compact.pdf
http://www.economicshelp.org/blog/5735/economics/should-the-government-intervene-in-the-economy/
http://www.lovelivehealth.com/debunking-absurd-myths-about-cows-milk/
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