effect of subsidy and taxes on agricultural production
Agricultural subsidy Government intervention, through agricultural subsidies, interferes with the price mechanism which would normally determine commodity prices, often creating crop overproduction and market discrimination. Subsidies are also an inefficient use of taxpayerâ€™s money. For instance, in 2006, the Department of Agriculture estimated that the average farm household income was $77,654 or about 17% higher than the average US household income.[58] From a public economics perspective, subsidies of any kind work to create a socially and politically acceptable equilibrium that is not necessarily Pareto efficient.[59]
Optimal tax Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that reduces inefficiency and distortion in the market under given economic constraints.[1] Generally, this criterion consists of individuals' utility and the optimization problem involves minimizing the distortions caused by taxation.[2][3] A neutral tax is a theoretical tax which avoids distortion and inefficiency completely.[4][5] Other things being equal, if a tax-payer must choose between two mutually exclusive economic projects (say investments) that have the same pre-tax risk and returns, the one with the lower tax or with a tax exemption would be chosen by a rational actor.[3] Thus economists argue that taxes generally distort behavior.