Suppose the U.S government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. It therefore implements a price floor of $1 per pint by buying surplus milk until the market price is $1 per pint. Use the accompanying diagram to answer following questions.

a) How much surplus milk will be produced as a result of this policy?
At a price of $1.10, producers would like to sell 800 million pints but consumers only want 600 million pints, there is a surplus of 200 million pints.
b) What will be the cost to the government of this policy?

c) Since milk is an important source of protein and calcium, the government decides to provide the surplus milk it purchases to elementary schools at a price of only $0.60 per pint. Assume that schools will buy any amount of milk available at this low price. But parents now reduce their purchases of milk at any price by 50 million pints per year because they know their children are getting milk at school. How much will the dairy program now cost the government?

d) Give two examples of inefficiencies arising from wasted resources that are likely to result from this policy. What is the missed opportunity in each

what exactly ?

just confused with part c

possibly

a) To determine the amount of surplus milk produced, we need to compare the quantity supplied by producers at the price of $1.10 per pint (800 million pints) with the quantity demanded by consumers at that price (600 million pints). The surplus is the difference between the two, which in this case is 200 million pints.

b) The cost to the government of this policy would be the cost of buying the surplus milk to maintain the price floor. In this case, the government would need to buy 200 million pints of milk.

c) With the new policy of providing surplus milk to elementary schools at a price of $0.60 per pint, parents will reduce their purchases of milk by 50 million pints per year. To calculate the cost to the government, we need to consider the reduced purchases by parents and the surplus milk that is provided to schools. The government would still need to buy the surplus milk of 200 million pints, but now the reduced purchases by parents add an additional 50 million pints. Therefore, the total cost of the dairy program to the government would be 200 million pints + 50 million pints = 250 million pints.

d) Two examples of inefficiencies arising from this policy are:
1. Wasted resources: The government is buying surplus milk, which is an inefficient allocation of resources. Instead of allowing the free market to determine the quantity produced and consumed, the government is intervening and purchasing surplus milk that may not be needed or wanted by consumers.
2. Missed opportunity: By implementing a price floor and artificially maintaining the price of milk at $1 per pint, the government is preventing market forces from adjusting to supply and demand. This can lead to missed opportunities for efficient allocation of resources. For example, if the market price of milk were allowed to fluctuate freely, it could potentially decrease below $1 per pint if there is an excess supply, which would be beneficial for consumers. Conversely, if the market price were allowed to increase above $1 per pint due to high demand or reduced supply, it would signal producers to increase their production, resulting in a more efficient allocation of resources.