As all ec 10 students know, competitive markets push firms toward the efficient scale, defined as the level of production that minimizes average total cost. The low costs are in turn passed on to consumers in the form of low prices. These conclusions no longer hold true, however, if government policy tilts the playing field by rewarding small scale.
Marginal- average rule: When marginal is below average cost, average cost falls, When marginal cost is above average cost, average cost rises. When marginal cost equals averages cost, average cost is at its minimum point.
For an Example:
Cane Harvesting Costs ( Herbert River Express, 3 October 2000)
…John Powell… explained to…to banks…lent to sugar cane harvesting industry that the industry was experiencing crisis of profitability. … brought about by lither crops, higher fuel prices and increase capital requirements, Here is some of what he had to say when addressing the issues:
In terms fuel, the average operator uses roughly 1000 litters a day, and more than $400 a day over the past year.
With light crops, harvesters are scratching to average 30 tones cut per hour but they are using the same amount of fuel as the would if they were cutting 60 tones. Effectively the cost of harvesting a tones of cane has doubled.
Capital repayment are being spread over half the tones, which effectively doubles capital costs.
The low product also impacts on labor costs and the costs of maintaining the machinery doesn’t change either.
And His Update:
The Food Security Act of 1985 significantly restricted the payments to large farmers. As a result, the farmers broke up their holdings by leasing the land to local investors. The investors would acquire parcels large enough to take advantage of the subsidies, but too small to run into the restrictions aimed at large farmers. Once the land was acquired the investor would register it with a government program that would pay the investor not to plant the land. This practice became known as "farming the government.''...Surprise but not so surprise update: This amazing but non-amazing thing! So the taxpayer money gone into fat doge big cooperation smart ass practice instead true frames subsides! If you know the rule you can manipulate whatever you like but that is very short-term stuff! But then this happening all the time
Note that the ostensible goal of the program---restricting the amount of government subsidies paid to large farmers---has not been achieved.When the large farmers rent their land to small farmers, the market price of the rents depends on the generosity of the Federal subsidies.The higher the subsidies, the higher the equilibrium rent the large farmers receive. The benefits from the subsidy program still falls on those who initially own the land, since it is ultimately the value of what the land can earn---either from growing crops or farming the government---that determines its market value.
