1. The most common example of a market with perfect competition is agriculture. How could farm subsidies distort a model of perfect competition? Explain.

In an ideal sense, agriculture is a prime example of perfect competition; easy entry and exit, homogeneous products, a large number of small firms, and open information of universal prices and technology used in the industry.The only other few markets that are perfect competition is the foreign exchange and internet auction industry. As agriculture maintains to be an industry that is the closest market to a perfect competition, farm subsidies tamper with the notion of having “a large number of small firms.”Although there are a large number of small firms, most of the subsidies that are …show more content…
Although cotton is produced at a cheaper price in less developed countries, U.S. producers are heavily subsidized for cotton. Consequently, American growers of cotton produce more than what can be sold in the U.S., thus causing the government to export the crop at “prices below cost of production taking the export opportunities away from farmers in poor countries (Pinstrup, 2010).” This is not only detrimental to foreign farmers, but also illegal according to WTO. The food and farming industry is instrumental to the survival of any country, which is why U.S. corn subsidies are dangerous for Mexican farmers. Farm subsidies provided by the U.S. create an unfair playing field for Mexican …show more content…
Farm subsidies are supposed to prevent farmers from losing profit and production, but since they are allocated on a per-pound basis, most of the money disbursed is given to owners of large commercial farms. Additionally, the Government Accountability Office reported that between 2007 and 2011, 3 million dollars in subsidies were paid to 2,300 owners of farms where no crops were even grown. Between 2008 and 2012, over 10 million dollars were paid to farmers who had been dead for over a year (The Economist, 2015). When owners of small farms are being underfunded and the government is not properly distributing subsidies, then they will go out of business. In the video “Farm Subsidies” John Stossel stated that “despite the billions of dollars spent on subsidies, farm towns are smaller than ever.” This proves that the system is counterintuitive and needs reform. Furthermore, subsidies create a significant surplus of crops. 90 percent of the produce subsidized include soybeans, wheat, cotton, corn, and rice, therefore farmers will only grow these crops to ensure that they receive money from the government (Riedl, 2010). When there is an excess supply of a crop, the government will buy the surplus and either store it or sell it to a foreign country for a reduced price. The surplus drives down the market price and hurts