Why are subsidies common in agriculture?

• A. To stabilize prices and incomes; can lead to overproduction and misallocation of resources and market distortions.
• B. To maximize short-run profits for farmers.
• C. To avoid any market distortions.
• D. To eliminate government intervention completely.

Answer: (C)

Subsidies in agriculture are common because farming faces a lot of risk and price volatility. Prices can swing due to weather, pests, disease, and changing global demand, and farmers’ incomes depend on harvest outcomes. A subsidy helps keep prices from collapsing and protects farmers’ incomes when market prices are low, supporting a steady food supply and rural livelihoods. But this support tends to encourage more production than the market would otherwise demand, leading to overproduction and a misallocation of resources toward farming. So subsidies aim to provide stability, yet they naturally cause market distortions. The idea of fully avoiding distortions or eliminating government intervention isn’t accurate, since subsidies themselves alter incentives and production decisions.