Price Controls

Siny Joseph, Kansas State University,
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Summary

Students will answer questions related to a Planet Money podcast "Big Government Cheese" and reinforce their understanding of implications of price controls and market outcomes.

Context for Use

This activity is appropriate for principles courses.

Students should have prior knowledge about price controls and demand/supply analysis.

No limit on class size.

One 50-minute class period would be sufficient for this activity.

Overview

Students will apply their knowledge of price controls to the events described in a Planet Money podcast. The podcast will be assigned prior to class. In class students will discuss the podcast and then answer the questions. The activity will reinforce their understanding of the implications of price controls for market outcomes.

Expected Student Learning Outcomes

Upon successful completion of this learning activity, students will be able to:

· Explain how a price control affects competitive market outcomes

· Evaluate alternate policy measures intended to help dairy farmers in the United States.

Information Given to Students

Students are required to listen to Planet Money podcast "Big Government Cheese" prior to class.

Activity:

Suppose that your team members are the staff economists for the Chief Economist at the United States Department of Agriculture (USDA). Your team has the task of recommending a policy designed to help struggling dairy farmers in the United States.

Which of the following policy measures would your team recommend?

A. The government should support dairy prices and buy surplus production.

B. The government should support dairy prices by limiting production (quota rights or payments to dairy farmers to reduce production).

C. The government should subsidize milk production.

D. The government should offer cash assistance to poor farmers.


Note: team reporters will be expected to have the appropriate supply-demand analysis to support the team answers in their individual notes.

Teaching Notes and Tips

The podcast assignment needs to be assigned before class. Students should have prior knowledge of demand and supply, and the concept of price controls.
The following follow-up questions are recommended for facilitating the debriefing conversation:

Have one set of reporters explain in words how they got their answers.

If class size and equipment allow, have another set of reporters come to the doc cam and talk the class through the S-D graphical analysis.

Encourage team reporters to persuade each other that their team answer is better. (Allow team reporters to change their recommendation if they wish.)
Ask team reporters about the effect of their policy recommendation on economic efficiency.

Ask team reporters about the effect of their policy recommendation on equity.

Ask team reporters how well-targeted is their recommended policy.

Ask reporters why the exit of dairy farmers from the market would be problematic. (The national security argument in the podcast seems pretty weak.) Why are such protections not offered to computer programmers or college professors?

Closing remarks: It is vital to discuss how the price floors imposed created a surplus leading to many inefficiencies in the market. Subsidies cause less inefficiency but are still poorly targeted. Direct payments to poor farmers violate many people's social norms regarding government handouts.

To conclude the activity the instructor can provide examples of price controls in other markets and countries.

In the United States, the ethanol program – government subsidizes ethanol producers, who buy up corn, pushing all grain prices above their targets – has made price support programs non-binding. Politically, both helping farmers and achieving energy independence gain voter support. Unintended consequences include rise in food prices, hurting many poor households.

The key points emphasized in this activity would be consequences of policy on the constituents.

Assessment

The Trump tariffs imposed on Chinese products have resulted in a reciprocal action by the Chinese government on US agricultural products. This has resulted in suffering by US farmers.
What type of price control has been suggested to help the farmers?
Will there be a surplus or shortage of agricultural products?
How will the program affect the consumers?

References and Resources

https://www.npr.org/sections/money/2018/08/31/643486297/episode-862-big-government-cheese