Question

Please carefully explain (using the theory of utility maximization) if a farmer would prefer to receive price supports or direct income supplements and why, ceteris paribus.

Answer 1

The theory of utility maximisation explains how individuals always try to maximise their utility and get the highest satisfaction from their actions. Price supports are subsidies provided to the farmers which will control the price whereas income supplements are direct payments which the farmers receive. Though it is necessary to provide both price support and income supplements to farmers, providing direct income supplements is preferred by farmers. This is because when the income is transferred to their accounts, it serves as a safety net against any loss. Moreover, as it is direct cash benefit, they would perceive it as maximising their utility. Generally, this helps farmers as their incomes are directly increased but price controls help them indirectly. A direct monetary benefit would be preferred over an indirect benefit as maximising utility.