Microeconomic aspects of government subsidies in the agricultural market

Abstract

It is known from the Czech practice that a very actual problem of economic policy is created by the subsidies on the prices of agricultural products. A price subsidy of agricultural product causes the price to be kept above its equilibrium level. We will use the microeconomic knowledge about the behaviour of average and marginal costs curves in the shortrun and long-run. We assume two agricultural fi rms in a perfect competition market. Th e agricultural large-scale company reaches a normal profi t, but the small family fi rm has higher costs, therefore it runs at a loss. Using the subsidy can ensure that the prices of agricultural products are set at a level, at which the farmers have appropriate incomes. However, a loss of effi ciency can occur because of the subsidy as the surplus, which is purchased by the government, and actually stays unused.