INTERACTION EFFECTS OF PROMOTION, RESEARCH, AND PRICE SUPPORT PROGRAMS FOR U.S. COTTON

(a) Free Market: No Program Effects From LDP or STEP 2

Here P_m* = Market Price = Supplier Price = Demand Price

∆PS = Producer Benefits from Demand Shift

P_M = Market Price = Demand Price

P_S = P_M + (P_L - P_W) = Supply Price

P_W = World Price, where P_W = F (P_M)

P_L = LDP Rate (Fixed)

(Shift effects on producer price:)

∆PS = (PS1 - PS0) = (PM1 - PM0) - (PW1 - PW0) = ∆PM - ∆PW
Since ∆P_W > 0, then ∆PS < ∆PM (Also LDP₁, < LDP₀)
Calculate ∆P_S accordingly

(c) Step 2 Program Effects

P_m = Market Price = Supply Price

P_W = World Price = Demand Price (Demanders are guaranteed
to pay world price + $0.0125)

(Shift Effects)

∆P_M is larger than it would be in a free market (∆P_M*)

∆Q is larger than it would be in a free market (∆Q*)

(d) Combined Effects of LDP & Step 2

Ps = Supply Price = Pm & (p_ - Pw)

P_W = Demand Price = World Price (Guaranteed + $0.0125—not depicted)

P_M = "Market" Price, though it is neither a supply nor a demand price

P_M* = Free market price

(Shift Effects)

∆P_S < ∆P_M, but ∆P_M vs ∆P_M* is an empirical issue