DO GOVERNMENT SUBSIDIES STABILIZE OR DESTABILIZE AGRICULTURAL MARKETS?

This study examines the effect of government intervention on output fluctuations in agricultural markets. It uses a simple model of supply and demand (i.e., a cobweb model), in which the government supports producers for agricultural goods in the form of subsidies. Within this framework, this study demonstrates that government intervention is a two-edged sword: it not only prevents the output dynamics from explosive oscillations but also causes highly irregular and persistent fluctuations somewhat like the one observed in the actual data. Copyright 1998 Western Economic Association International.