Monday, August 22, 2011

How Subsidies Distort Economic Resources: Chicken Edition

CNN reports that the USDA is making a special purchase of $40 million worth of chicken in an effort to bailout chicken farmers. The goal is to absorb a substantial excess supply of poultry. "Total chicken production in the first half of 2011 rose 4% compared to the same period a year ago, while demand for chicken has cooled, according to the National Chicken Council." Lower prices due to increased supply coupled with higher costs of production has put many poultry farmers in a rather tight financial situation.

Why did chicken production increase 4% over the past year even though costs rose noticably? An important part of the reason is government subsidies. CNN reveals:
The government made a similar move with a $30 million purchases of chicken products last year and a $42 million purchase of chicken products on 2008 with the intention of stabilizing retail prices.
In a free society those who cannot profitably operate in an industry must either liquidate their capital or direct it toward more productive uses. Instead, the USDA hampers the market and resources are mis-allocated such that more scarce factors of production are directed toward chicken production than people in society desire. Scarce land, labor, and capital are hampered from being invested in more highly valued uses. That is nothing to crow about.

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