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INSIDE THE BYZANTINE WORLD OF MILK PRICES

Presented by:

Group 1 | Sec. D | PGDM | 2016-18

Aankush Tyagi (2016190)


Abhradita Sen (2016191)
Aditya Subramaniam (2016192)
Aishani Das (2016193)
Aishwarya Usgaonkar (2016194)
Alankrita Mishra (2016195)

Click for image source


WHY EAU CLAIRE RULE CAME INTO BEING
1930s federally regulated minimum pricing system
was established
Why? Dairy farmers were losing money

Eau Claire Rule(1960s) The farther a state was


from Eau Claire, the higher were the federal price
subsidies paid to its dairy farmers

This rule originally intended to ensure an adequate


supply of fresh milk around the country

1960s Upper Midwest farmers started shipping


their milk to regions across USA Why? Shortage of
milk supply in other parts of USA; Advent of
refrigerated trucks

Click for image source


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AFTERMATH OF EAU CLAIRE RULE

A group of Upper Midwest dairy farmers filed a suit in 1989 that led to Judge Doty's decision of revoking the Eau Claire
Rule in 1997

Resultantly, state lobbyists and lawmakers came together to save the local dairy farmers

Even before the revoke order came from court, New England had created a bill called Northeast Interstate
Dairy Compact to ensure that cheap Midwest milk doesn't affect local producers' prices by pricing all milk the
same

U.S. milk consumption has been stagnant over the past several years because such regulations does not guarantee
that demand increases

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BUYERS AND SELLERS PERSPECTIVE

Buyers Sellers

Benefits: Benefits:
1. Easier availability as more milk is being 1. Sellers outside Eau Claire received bonus for
produced being located away from the Milk Belt
2. Because of this incentive more dairy farmers
were encouraged to enter the business

Drawbacks:
Drawbacks: 1. Market became imperfect, as some suppliers
got geographic advantage
1. In spite of increase in supply of milk (an essential
commodity), price did not decrease
2. Unequal marginal cost for suppliers
2. Unequal marginal benefit for consumers

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DEMAND-SUPPLY RELATIONSHIP
Supply (1930s)

Supply (1930s)

($ per gallon)
Supply (1960s)

Price
Fig.1
Demand

Quantity (Gallons per year)


Fig. 2- Milk Belt (marginal supply Fig. 3 Non-Milk Producing areas
increase) (significant increase in supply)
Supply (1930s) Supply (1930s)

Price ($ per gallon)


($ per gallon)

Supply (1960s) Supply (1960s)


Price

Demand Demand

Quantity (Gallons per Quantity 5


year) (Gallons per year)
WHO LOSES BUYERS OR SELLERS SURPLUS ?

Theres increase in prices in spite of excess supply

The Sellers are eating up the Buyers Surplus

Yet the sellers are losing due to decrease in quantity

So, the sellers loss and buyers loss are together creating Deadweight Loss

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DEMAND-SUPPLY RELATIONSHIP
a b e f
Supply (1930s) Supply (1930s)
($ per gallon)

c d
P1 E1 E1

($ per gallon)
Supply (1960s) P1
Price

Supply (1960s)

Price
P2 e E2
P2
c E2
Fig. 4 - Initial g Fig. 5 - Expected
Situation Situation
Demand
Q1 Q2 e Demand
Quantity (Gallons per year) Q1 Q2
Quantity (Gallons per year)
a b Supply (1930s)

Pf c d E1 h
Dead-Weight Loss
($ per gallon)

P1 g
Legends
Price

Supply (1960s)

P2
f E2 Buyers surplus
Suppliers surplus
Fig. 6 - Current e Demand
Situation Q1 Q2 Qf
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Quantity (Gallons per year)


DAIRY COMPACT

Senator Patrick Leahy from Vermont inserted a provision for a six state milk-price compact into the 1996 farm
bill, i.e., Northeast Interstate Dairy Compact

Aim was to insure cheaper Midwest milk does not compete with the expensive New England variety by
pricing all milk at the same price

The price floor to farmers for beverage-grade milk was at $1.46 a gallon, a level that has been 5% to 22% higher
than the federally mandated minimum price

Due to this, each local diary farmer received $1000 more per month, thereby eating into the Buyers Surplus

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GOVERNMENTS INTERFERENCE

The Government intervention led to increased bureaucracy thereby bringing about inefficiencies in the
economy

Policies aimed at protecting interests of a certain group can adversely affect the economy in the long run. The Eau
Claire Rule and the Dairy Compacts helped inefficient farmers stay in business

Government pricing, if deemed necessary, should have a timely revaluation without the need for a court verdict

"The nine most dangerous words in the English language:


We're from the Government, and we're here to
help."
-President Ronald Reagan, 1986

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REFERENCES

Managerial Economics by Ivan Png, 5th Edition (Special Indian Edition), Routledge

http://www.swlearning.com/economics/mankiw/principles2e/student/ch06/price.html

http://icetronauts.tripod.com/milk.htm

https://www.scribd.com/doc/113574738/Kilman-Byzantine-Pricing-of-Milk-1997

http://aic.ucdavis.edu/research1/compact.pdf

http://www.economicshelp.org/blog/5735/economics/should-the-government-intervene-in-the-economy/

http://www.lovelivehealth.com/debunking-absurd-myths-about-cows-milk/

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