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.