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Chapter 6:  Government Intervention in Markets

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Chapter 6:  Government Intervention in Markets

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Instructions:  View instructions on the section padlet.

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Instructions:  View instructions on the section padlet.

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Team:  Students will do one chapter per section.  View your assigned padlet at this link.

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Team:  Students will do one chapter per section.  View your assigned padlet at this link.

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When the government sets a minimum price.

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While the U.S. 2021 corn and soybean crop estimates remain unchanged, this year's Brazil soybean crop is getting smaller, according to the USDA.

On Wednesday, the USDA released its January Supply/Demand, WASDE, and Quarterly Grain Stocks reports.

As a result, the CME Group's soybean market moved lower then turned higher, corn lower, and wheat lower.

At the close, the March corn futures finished 2¢ lower at $5.99. May futures closed 1 3/4¢ lower at $6.00. July corn futures ended 2¢ lower at $5.98.

March soybean futures closed 12 3/4¢ higher at $14.08.

May soybean futures ended 12 3/4¢ higher at $14.13. New crop November soybean futures ended 12 3/4¢ higher at $13.12.

March wheat futures closed 13 1/4¢ lower at $7.57.

March soymeal futures closed 3.10 per short ton higher at $416.20.

March soy oil futures settled 0.50 of a cent higher at 59.37 per pound.

In the outside markets, the crude oil market is $1.71 per barrel higher at $82.93 the U.S. Dollar is lower, and the Dow Jones Industrials are 17 points higher (+0.05%) at 36,269.

U.S. 2021/22 CROP PRODUCTION

In its report, the USDA pegged the U.S. corn production at 15.11 billion bushels (second highest on record) vs. the trade's expectation of 15.06 billion and the previous estimate of 15.06 billion bushels.

The U.S. corn yield average was pegged at 177.0 bushels per acre vs. the trade's expectation of 177 bushels per acre and the USDA's previous estimate of 177.0.

For soybeans, the USDA pegged output at 4.43 billion bushels, a new all-time high with 21 states reporting record-high yields. The trade's expectation was 4.4 billion vs. the government's November estimate of 4.42.

For yield, the soybean average is pegged at 51.4 bu./acre vs. the trade's expectation of 51.3 bu./acre and the government's previous estimate of 51.2.

USDA pegged the U.S. 2022 winter wheat plantings at 34.3 million vs. the trade's expectation of 34.2 million acres.

2021/2022 WORLD CROP PRODUCTION

On Wednesday, the USDA pegged the 2021 Brazilian soybean production at 139.0 mmt vs. the USDA's estimate last month of 144.0 mmt. and the trade's expectation of 141.6 mmt.

For corn, Brazil's output is seen at 115 mmt. vs. the trade's expectation of 116.1 mmt. and the USDA's December estimate of 118.0 mmt.

For Argentina's soybean output, the USDA pegged its crop at 46.5 mmt. vs. the USDA's December estimate of 49.5 mmt. and the trade's expectation of 48.11 mmt.

Argentina's 2020/2021 corn crop is pegged at 54.0 mmt vs. the USDA's previous estimate of 54.5 mmt. and the trade's expectation of 53.5 mmt.

2021/2022 U.S. Ending Stocks

For corn, the USDA pegged the U.S. new-crop ending stocks at 1.54 billion bushels vs. the trade estimate of 1.47 billion bushels and the December estimate of 1.49 billion bushels.

For soybeans, the U.S. ending stocks were 350 million bushels vs. the trade that expected the USDA to print 348 million bushels today. In December, the USDA's estimate was 340 million.

In its report, the USDA pegged the U.S. wheat ending stocks at 628 million bushels vs. the trade's expectation of 608 million and compared with the December estimate of 598 million bushels.

2021/2022 World Ending Stocks

On Wednesday, the USDA pegged the world's corn ending stocks at 303 mmt. vs. the trade's expectation of 304 mmt. and the USDA's December estimate of 305.4 mmt.

For soybeans, the world ending stocks are estimated at 95.2 mmt. vs. the trade's expectation of 99.9 mmt. and the USDA's December estimate of 102.0 mmt.

For wheat, the USDA pegged world ending stocks at 280 mmt. vs. the trade's expectation of 278.5 mmt. and the USDA's previous estimate of 278.1 mmt.

Quarterly Grain Stocks

For corn, the USDA printed stocks as of Dec. 1 at 11.6 billion bushels vs. the trade's expectation of 11.6 billion bushels.

For soybeans, the USDA pegged the quarterly grain stocks at 3.14 billion bushels vs. the trade's expectation of 3.1 billion bushels.

The USDA sees the U.S. wheat quarterly grain stocks at 1.39 billion bushels vs. the trade's expectation of 1.40 billion bushels.

U.S. Acreage

In its report, the USDA pegged the U.S. 2021 corn harvested acreage at 85.4 million vs. the trade's expectation of 85.0 and the NASS November estimate of 85.08 million.

For soybeans, the U.S. 2021 harvested acreage is pegged at 86.3 million vs. the trade's expectation of 86.4 and the NASS's November estimate of 86.4 million.

USDA pegged the U.S. 2022 winter wheat plantings at 34.3 million vs. the trade's expectation of 34.2 million acres.

READ MORE: Keep your 2022 grain marketing pencil sharpened

Trade Reaction

Peter J. Meyer, S&P Global Platt's head of grain and oilseed analytics, says that USDA offered very little new information.

"Pretty ho-hum report. In some ways it should have been expected as planting and harvest was early last year, so the data that NASS collected was more mature by November than usual. Cuts to South American production forecast were expected, so nothing new there either. For now, we need to keep an eye on weather in Brazil and Argentina because the USDA didn't give us anything new today," Meyer says.

Sal Gilbertie, Teucrium Trading, says that the USDA offered very little news.

"Not really any surprises other than official confirmation that wheat is pricing itself out of feed rations. Slightly tighter soybean numbers than expected seems to be supporting the soybean markets for the time being. South American weather will continue to be the focus of traders for the next several weeks," Gilbertie says.

Jason Roose, U.S. Commodities, says that today's report shows that there is price floor support in the bean market.

"Grains continue to look for direction before and after the well anticipated January USDA crop report. Corn and soybean production was increased along with a slight increase in yield for soybeans from the December report. Corn exports were lowered by 75 mln bushels but were offset by an increase in ethanol demand. World corn ending stocks were dropped 2.4 mln tns and world soybean ending stocks were lowered almost 7 mln tns. This is keeping price premium with potential future South American crop weather issues," Roose says.

Jack Scoville, PRICE Futures Group, says that the USDA numbers didn't shakeup the market.

"The corn production was up a little and I had thought it would be down a little. The Brazil and Argentina corn numbers could have been cut more. Demand could have been stronger. All in all, not the corn numbers I was looking for. Beans on the other hand had demand hold up pretty well and production was fine. The Brazil and Argentina estimates were down a lot and that's ok with me, for now. The wheat estimates are pretty bearish across the board, not much at all for any bullish trader to go after there. But, maybe wheat is cheap enough now," Scoville says.

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USDA's global data supports soybean market

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While the U.S. 2021 corn and soybean crop estimates remain unchanged, this year's Brazil soybean crop is getting smaller, according to the USDA. On Wednesday, the USDA released its January Supply/Demand, WASDE, and Quarterly Grain Stocks reports. As a result, the CME Group's soybean market moved lower then turned higher, corn lower, and wheat lower.

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-Tax on sellers shifts the supply curve.
-Tax leads to a decline in the quantity sold.
-Tax increases the price buyers pay and decreases the price sellers receive.
-Both buyers and sellers bear the economic burden of the tax on sellers.

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1. Is the supply or demand curve shifting?
2. Is that shift and increase in taxes, shifting the curve to the left? Or is it a decrease in taxes, shifting the curve to the right?
3. How will prices and quantities change in the new equilibrium?

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-Tax on buyers shifts the demand curve left.
-Tax leads to a decline in the quantity sold.
-Tax increases the price buyers pay and decreases the price sellers receive.
-Buyers and sellers bear the economic burden of a tax on buyers.

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A payment made by the government to those who make a specific choice.
(ie. lower-income people who choose to go to college.)

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Great video by Khan Academy showing the changes in the supply and demand curves when taxes are introduced.

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Voiceover: Let's look a little bit at the market for hamburgers. This is the supply and the demand curve for the price and the quantity of hamburgers sold per day. If we have a completely unfettered market, no intervention, no taxes, nothing like that, then we see we have an equilibrium price and an equilibrium quantity. The equilibrium price looks like it's about $3.75 per hamburger. The equilibrium quantity looks like it's about a little bit more ... Maybe if I draw that line a little bit differently, the equilibrium quantity looks like it's about $3 - Sorry, it's about 3.5 million hamburgers per day. Just to review what we've talked about before, up here, below the demand curve and above the price. The price equals $3.75 line, right over here. This is how much value, this is how much benefit the consumers are getting above and beyond what they have to pay. That is the consumer surplus. Then, between this price equals $3.75 line and the supply curve, you have your producer surplus. This is how much more the producers are getting for each hamburger, relative to what their opportunity cost of producing that incremental hamburger was. This right over here is the producer surplus. Now, let's say ... Actually these numbers are quasi-realistic. I have a 3.5 million hamburgers per day. I actually looked it up before this video. It looks like McDonalds, at least based on the information I got, sells a little bit over 4 million hamburgers per day in the United States. I didn't clarify whether this is just hamburgers from one vendor or multiple vendors, but it's not a crazy number of hamburgers to sell in a fairly large country. For the sake of this, it's not necessarily McDonalds hamburgers, we're just talking about this is the total market for hamburgers in a country. We're making the simplifying assumption that all hamburgers are created equal, which we know is not true. Now, the government in this hypothetical civilization says, "Wow, a lot of hamburgers are being sold. "We need more revenue for the government "to do other things," or maybe to pay off their debt or whatever they need to do. So they decide to tax hamburgers. They want to tax hamburgers. They're going to make it very simple. They're not even going to do a percentage. Most sales taxes tend to be a percentage of the price, but instead they're just going to do a tax of $1 per hamburger. Let's think about what this does to the surplus, to the price at which transactions will go on and what people will have to pay versus what they will have to get. At any given point, if we look at the supply curve right over here, in order to get someone to produce that very first hamburger, they have to get at least $2 for it, because that's their opportunity cost. They could use those exact same resources, that land, the labor, whatever else, to produce something else that has $2 of value, so you have pay them at least $2 in order for them to produce hamburgers. The more hamburgers you want the suppliers to produce you have to pay them more and more for those incremental hamburgers, because they're going to start using resources that might have better used for other things and that are not as efficiently used for hamburgers. You have to pay them more and more and more. This is what the supply curve that I originally drew in magenta is what the suppliers need to see in order to produce a certain quantity. If you want them to produce 3 million hamburgers, you have to be willing to pay $3 per hamburger, because that's their opportunity cost of those incremental hamburgers up here. Now, let's think about what happens when you add the tax. This is what the suppliers are going to get or the producers are going to get, but when you put a tax, the consumers are going to have to pay a dollar more. Over here, in order to produce this much, the suppliers are going to have to get $3 per hamburger, but then the consumers are going to have to pay a dollar more, so they're going to have to pay $1 more. In order to get the suppliers to produce 2 million hamburgers, you're going to have to pay them this much, you're going to have to pay them about $2.50, but then the consumers are going to have to pay a dollar more than that. They're going to have to pay that much. In order to get them to produce it all, you're going to have to pay at least $2, but then if the suppliers or producers are getting $2, the consumers are going to have to pay a dollar more for the tax. One way to think about it is the supply curve, from the consumer's point of view, is going to be shifted a dollar more than the supply curve from the producer's point of view. It's going to be shifted up $1, so it's going to look something ... I can do a better job than that. It's going to look something like that. At every point, because this is a fixed dollar, it's not a percentage, at every point, this distance right over here is going to be $1. What happens there? From the consumer's point of view, what we have is now a new price that they're willing to consume at, because now this reality is not possible anymore. There's no way for the consumers to pay $3.50 and for the producers to see $3.50, as well. So we get to a new equilibrium price and equilibrium quantity now, because now, since this is from the consumer's point of view, the point at which they intersect is right over there, which is about a little bit over $4 per burger and it's a slightly lower quantity. It's about, let's just say just for round numbers, that's about 3 million burgers per day. What happened there? Before this whole area was a total surplus. Below this green line was the producer surplus, above the green line and below this curve right here was the consumer surplus. Now we've lost part of it. We've lost this part right over here, so this is our dead weight loss. This is no longer part of the total consumer and producer surplus. That is dead weight loss. The taxation got us from an efficient situation, where we had that maximum consumer and producer surplus. This is our dead weight loss over here. How much revenue is the government going to get now? Well, if we assume that this is 3 million, they're going to have 3 million burgers. This is 3 million right over here. They're going to have 3 million burgers times a dollar per burger. Let me do it this way. This length right over here is going to be the area of this rectangle that I'm doing in orange. This length right over here is 3. That length right over there is 3 million and then height is that dollar. Let me shade it in. The height is that dollar right over there. This is going to be $1 height. The tax revenue that the government is going to get is 3 million times $1. 3 million burgers times $1, which is going to be $3 million per day, which is interesting, because maybe the government officials thought they were going to get more, because they look at the projections and they say, "Wait. "There's going to be 3.5 million burgers sold per day, "so I'm going to get $3.5 million." What they didn't realize is that they're making the burgers more expensive, so there's going to be a lower quantity demanded. The actual clearing quantity or the actual equilibrium quantity now is only going to be 3 million. The way we see it, it removed this surplus here, from both the consumer surplus and the producer surplus and no one's getting that, not even the government's getting that. No one's getting that white part right over there and this orange part right over here is eating into the consumer surplus, so now they're paying more than ... Another way to think about it is the difference between the benefit they're getting and what they're paying at any given point, for any given incremental consumer, is now less and the producer surplus is less. The excess of what they're getting for each hamburger versus their opportunity cost is now less. The producer surplus has now been shrunken back to this area right over here and these are curves here, so we can't just do simple geometry to figure out the area of triangles. We would actually have to do a little calculus to figure out the area of these curves. Then the consumer surplus has been pushed back to this area above the orange right over here. You see, governments, for the most part, have to do some type of taxation in order to get revenue and it could be income tax or it could be a sales tax, like this right over here, but when they do it, it gets us into a non-efficient state and it does cause some, depending on how these curves are shaped, it does cause some dead weight loss. Some benefit in excess of what had to be paid, some of that disappears, but it allows, at least, the government to get revenue, depending on whether you think that's a good thing or not.

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Taxation and dead weight loss (video) | Khan Academy

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Voiceover: Let's look a little bit at the market for hamburgers. This is the supply and the demand curve for the price and the quantity of hamburgers sold per day. If we have a completely unfettered market, no intervention, no taxes, nothing like that, then we see we have an equilibrium price and an equilibrium quantity.

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Gotta love YouTube for video examples and explanations.

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Price Ceilings and Floors- Micro Topic 2.8

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When the government sets a maximum price.

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The division of the economic burden of a tax between buyers and sellers.

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A payment made by the government to those who make a specific choice.

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The division of the economic burden of a tax between buyers and sellers.

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A maximum price that sellers can charge.

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https://www.youtube.com/watch?v=TdDzauHmIKE

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Lecture 2c - The Interdependence Principle

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This section explains both taxes and subsidies. Taxes will increase cost on buyers and sellers, which will then shift the demand or supply curve. The same new equilibrium will occur, so it doesn't matter which curve it effects. The same is true for subsidies, however these lead to benefits instead of cost. The amount of economic burden for taxes and economic benefits from subsidies that sellers and buyers receive are based on the elasticities of supply and demand.

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This section is all about price ceiling and price floors. The textbook used an example of apartments in New York, as the price ceiling is set to have a maximum price of rent. However, this leads to a shortage of apartments people can buy. The book also talked about anti-price gouging laws, which in the event of disaster stores cant raise prices. This is another example of a ceiling. The textbook uses the example of minimum wage, which is a price floor that companies have to pay, which leads to surplus.

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This section talked about quantity regulations, as a mandate is a minimum amount of buy or selling a good. A quota is a maximum amount of a good that can be sold. The textbook explains how quotas raise prices because it causes a maximum for a good that can be sold, but the demand will be higher and cause buyers to pay more for it. An example the book used was a zoning law, which puts a maximum amount of houses that can be sold in an area. The book then talks about how Uber and Lyft are in competition with the New York taxi quota.

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A requirement to buy or sell a minimum amount of a good.

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A limit on the maximum quantity of a good that can be sold.

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Chapter 6.3 Figure 7, which shows an example of houses in the Seattle area.

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Statutory Burden: the burden of being assigned by the government to send a tax payment

Economic Burden: the burden created by the change in after-tax prices faced by buyers and sellers

Tax Incidence: the division of the economic burden of a tax between buyers and sellers

A general insight about all taxes: It doesn’t matter whether the buyer or seller is assigned by the government to send in the tax; the end result is exactly the same.

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In the chapter 6, government intervention in the market, they talked about how the government decides on the wage for the benefit of the citizens, where they are based on the cost of living. Also l, this chapter talks about the raise of taxes or price by the government to make sure they are reducing the consumption of a specific product. There is always the negative and positive effects on seller and buyers.

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In the chapter 6, government
intervention in the market, they
talked about how the government
decides on the wage for the
benefit of the citizens, where they
are based on the cost of living.
Also I, this chapter talks about the
raise of taxes or price by the
government to make sure they are
reducing the consumption of a
specific product. There is always
the negative and positive effects
on seller and buyers.

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Example how government intervenes in market

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Example how government intervenes in market

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https://www.usnews.com/opinion/economic-intelligence/articles/2018-01-08/americans-need-to-wise-up-about-the-reach-of-federal-regulations

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The Trump administration has been cutting regulations in the last year, but the vast majority of the public doesn't know which he has removed or, for that matter, much about federal regulations period. Here are some facts you might want to know.

Who pays for regulations and how much do they cost? Among others, you do - through higher prices, reduced returns to your retirement stocks and lower wages. Last year, Americans spent $10.7 trillion while regulations cost them about $2 trillion - or almost 20 cents out of every dollar spent. If we had stopped regulating in 1980, the average American would have $13,000 more in their pockets. In fact, federal regulations cost $160 billion more than what the IRS takes in in taxes each year.

How much regulation are we talking about? Every single year, the federal government imposes between 2,500 to 4,500 regulations and, to learn about them, you would have to read 70-80,000 dense legal pages in the Federal Register (albeit much fewer in 2017). The number of pages of regulations implementing just the Affordable Care Act exceeds the length of the Bible by eight times.

If you can read 300 words per minute, it would take you almost 3.5 years (with weekends off) to read the entire Code of Federal Regulations (over 100 million words). However, to understand it, you will likely be reading until we inaugurate the first robot U.S. president. (OK, this last part is made up.)

Cartoons on President Donald Trump

Federal regulators like to really crank it up when a president is leaving office. Since there is much less oversight, they impose " midnight regulations" (a big surge) in the few months prior to a new administration.

What are some examples of these regulations? Scattered among the worthwhile regulations are some like these:

The Trump administration recently discarded a rule that banned selling bottled water in some national parks, even as sweetened beverages were sold.

If a cherry pie has too few cherries, a federal standard says it must either be labeled as "substandard" or "below standard in quality with too few cherries."

The Department of Justice decreed that hotels, restaurants and airlines must treat miniature horses equal to dogs as a viable alternative to canine service animals.

Between 1996 and 2014 the FDA's budget for food safety went from $201 million to $883 million but it had no provable impact on food safety.

Who oversees the regulatory bodies? The President's Office of Information and Regulatory Affairs is supposed to oversee all regulatory activities in executive agencies. When it was formed in 1981 there were about 77 staffers overseeing 115,000 regulators. In 2012, there were about 50 OIRA staffers overseeing nearly 250,000 regulators.

Between 2004 and 2013, out of 33,982 regulations, only 116 included estimates of their benefits and costs. During a press conference late in his presidency, Jimmy Carter said that although he expected federal bureaucracy to be a serious challenge, the reality had been "worse than [he] had anticipated."

Congressional oversight of regulatory agencies has diminished over time. Up until 1983, America's lawmaking body could exercise a legislative veto over regulations. The Supreme Court put a stop to that in INS v. Chadha. In addition, since 2011, Congress has introduced over 200 laws to reform regulatory bodies. None have been signed into law.

The courts tasked with interpreting our laws certainly play a role, but regulators get to choose how they want to interpret federal laws that authorize their regulations. The courts have decided that somehow regulators are better equipped to determine what laws mean than are judges (see Chevron v. NRDC).

How do other countries feel about regulations? One of the big reasons the British voted to leave the European Union with the Brexit vote was regulation from Brussels. One of the regulations in question said that diabetics should only get a driver's license under "exceptional circumstances."

Quality regulations with proper oversight are good and necessary. Most Americans put little thought into them, but for most of the small businesses in this country, they are deadly serious. 430 federal departments, agencies and sub-agencies are at work year-round producing an average of 10 regulations every single day of the year with minimal oversight from any of the three branches of government. Every American should be concerned.

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The Trump administration has been cutting regulations in the last year, but the vast majority of the public doesn't know which he has removed or, for that matter, much about federal regulations period. Here are some facts you might want to know. Who pays for regulations and how much do they cost?

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Price Ceilings and Floors, Subsidies, and More

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Price Ceilings and Floors, Subsidies, and More

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I think Crash Course videos do an excellent job of summarizing key points and providing relevant examples all while keeping the video engaging. This video dives into price ceilings and floors and subsidies and applies them into economies and the real world.

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Price Controls, Subsidies, and the Risks of Good Intentions: Crash Course Economics #20

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Price Ceiling on Groceries Imposed in Hungary

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Price Ceiling on Groceries Imposed in Hungary

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While this article is exactly a month old, it is still relevant and can pertain to this chapter. Inflation in Hungary is steadily increasing so as a result, Prime Minister Orbán imposed a price ceiling on some common groceries such as milk, sugar, and chicken breast. Several economists comment on this decision and its impact on the Hungarian economy.

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Price controls almost never achieve their goal, but Hungarian Prime Minister Viktor Orbán has decided to utilize them anyway.

(POOL NICOLAS MAETERLINCK/BELGA/Newscom)

Hungarian Prime Minister Viktor Orbán this week announced a plan to place price controls on several common grocery items ahead of a national election and in response to rising inflation.

Starting on February 1, the prices of milk, sugar, flour, sunflower oil, leg of pork, and chicken breast will be rolled back to last year's October 15 levels. Hungary has endured record inflation across sectors since the end of October.

Gergely Gulyás, the head of the prime minister's office, announced that the measures are currently slated to last for three months. However, that timetable could be extended if Orbán so chooses.

Who this newly announced policy would benefit is certainly debatable.

According to an economic analysis provided by Hungarian news outlet Portfolio , large multinational and discount chains are the least likely to suffer from the price control mandate, as their prices are already low. The analysis suggests that small family-owned grocery stores tend to charge significantly higher prices and would therefore be more likely to be adversely affected by the price caps.

That's to be expected, as Duke University political scientist Michael Munger in December for The Wall Street Journal about American progressives pining for federal price controls to combat inflation. "Economists across the ideological spectrum agree that government plans to manage prices haven't worked," Munger noted. "In the 1970s, when a federal board was organized to manage price increases, the results were massive profits for a few corporations and the loss of jobs and consumption choices for the middle class."

If Hungary's inflation continues to worsen, price controls won't stop the slide. In 2003, Venezuela placed strict price controls on basic staple foods with the intention of helping the average family more easily put food on the table. A massive food shortage ensued due to wholesalers and suppliers stopping deliveries. The country added new price controls in 2020. Inflation in the country skyrocketed between those two periods, and price controls have done nothing to increase access to staple goods.

In 2013, India expanded price controls for 652 essential pharmaceutical drugs. Much like Venezuela, the Indian government intended to help the poor, many of whom struggled to afford drugs. The price controls had the unintended effect of reducing drug supply, because the lower profit margins led many manufacturers to swap to nonessential drugs or shut down altogether.

Austrian-born free market economist Ludwig von Mises saw price controls as a disastrous economic policy that results in shortages and corruption.

" Those who come first can buy; others are too late in the field. The visible outcome of this state of things is the sight of housewives and children standing in long lines before the groceries, a spectacle familiar to everybody who has visited Europe in this age of price control," Mises wrote in Omnipotent Government (1944). "But price ceilings not only fail to increase the supply, they reduce it. Thus they do not attain the ends which the authorities wish."

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Hungary To Place Price Ceiling on Groceries

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(POOL NICOLAS MAETERLINCK/BELGA/Newscom) Hungarian Prime Minister Viktor Orbán this week announced a plan to place price controls on several common grocery items ahead of a national election and in response to rising inflation. Starting on February 1, the prices of milk, sugar, flour, sunflower oil, leg of pork, and chicken breast will be rolled back to last year's October 15 levels.