Question

Cotton growers receive a guaranteed price higher than the equilibrium price. Explain what happens to the market equilibrium. Why should the government do it?

Answer 1

Cotton growers receive subsidies as there is a huge risk in its production process and the main purpose of subsidies was to help the farmers who had low incomes. Subsidies and cotton prices have a negative correlation. The subsidies decline when price rate is high, and the subsidies rise when the price of cotton is low. So if the subsidies rise, the market equilibrium will fall. The government still provides subsidies, as they are given in the form of support to crop insurance, production, mechanism of minimum price support etc.