Question

One of the most contested area of trade is agriculture. What lies behind our agricultural product is the presence of market distorting policies. Specifically, the agricultural sector is heavily subsidized. In fact, it is not only in the United States but also in many countries. In this situation, how is business decision influenced if the market is distorted by subsidies?

Answer 1

Ans. The subsidies given to firm reduces cost of farming and thus, artificially increases the supply of agricultural products. This will eventually decrease the prices of the produce further unless the government subsequently buys the produce from the farmers. Thus, subsidies distort markets as there is excess supply of produce leading to further intervention by the government in buying the excess produce to save the farmers from losses.

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answered by: anonymous