The Political Economy of Price Supports

Citation

Campos, Jose Edgardo L. (1987) The Political Economy of Price Supports. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/a3v4-7242. https://resolver.caltech.edu/CaltechTHESIS:08302019-100135323

Abstract

Economic analyses of public policy typically focus on the detrimental effects of market failure. Because of inherent imperfections, a market may not function properly. Government is then called upon to rectify the situation. Implicit in this argument is that government intervention generates a net social gain; the gainers from the intervention can, in principle, compensate the losers.

Proponents of U.S. agricultural price support policies often adopt this perspective. Recent studies, however, have cast some doubt on this argument. If anything, they suggest that such policies have generated net social losses.

If agricultural price support policies do not benefit society, why, then, do they exist? Political scientists provide some insight into this matter. The electoral objectives together with certain Congressional institutions such as the committee/subcommittee system facilitate the passage of legislation that confers benefits to narrow interests while distributing the costs over larger, less organized interests. Political models, however, do not identify the underlying economic factors which define feasible policy outcomes.

Some nontraditional economic models, notably those of Stigler, Peltzman, and Becker, do address the connection between economic conditions and policy outcomes. But these models are stripped of relevant political institutions. Consequently, like their political science counterparts, they fail to completely describe the mapping from political preferences and economic phenomena onto policy outcomes. In short, neither class of models provides an adequate explanation for the existence of price supports.

In this manuscript, I develop a formal political economy model of price supports that incorporates the interaction of economic forces, organizational costs, electoral objectives, and Congressional institutions in the enactment of price support legislation. My efforts are an attempt to utilize certain aspects of microeconomic theory and political theory to construct a positive theory of agricultural price supports. Most studies have concentrated mainly on the welfare (normative) aspects of price support policies. Some have dealt with the political foundations but they fail to consider the normative implications. But who gains and who loses, and the extent and the distribution of the gains and losses, have a great deal to do with the final outcome. This inadequacy, I believe, derives from the absence of an analytical model within which the interaction of the economics and the politics of price support policies can be studied.

A regulatory policy can be implemented in various ways. But for the most part, political scientists and economists have ignored or downplayed this characteristic. Consequently, their models do not have much predictive power. They cannot say much about the nature of a particular regulatory policy.

Different instruments have been used to support prices of agricultural commodities (in the U.S.). Support programs have varied both across commodities and over time for a particular commodity. I expand my formal model to make it suitable for studying the implicit choice process.

I use the model to generate two sets of hypotheses. The first set involves propositions pertaining to the relationship between selected exogenous economic and political variables and the level of price supports. The second set involves propositions pertaining to the relationship between a slightly different set of political and economic variables and the choice of method used to support prices. I test the hypotheses econometrically against data from selected U.S. agricultural markets.

Thesis Files