Question on subsidising?

Question

struggling to even understand the question... please advise me on how should go on about it...

it contains a diagram. So can you please follow the link and view the question and HELP ME ANSWER IT !!


http://keynesian.info/question.JPG

Thank you.

Answer 1

Scheme 1) The government guarantees a higher price P2. Suppliers will want to produce C amount at P2. Then to sell that amount of milk to consumers the price would have to fall to I and P0. So government guarantees p2, consumers are now only willing to pay p0, the government ends up paying quantity q2 x(p2-p0) or the area of square p0p2CI (6 squares)

Scheme 2) The government buys milk to get price to P2. At P2 demand is going to be A. and q0. Supply at P2 is still C, so the government is buying q2-q0 x p2. Or square ACq0q2. This area is less than the other and lower cost.

I think what they are looking for is scheme 2 is cheaper, but only if the government bought milk doesn't get back into supply. They will have to destroy it. (Or ship it to 3rd world countries that need it, but that is idiotic because it has a short shelf life and is bulky so it can't be done. You could turn it into powdered milk, but 3rd world countries are hot and lack water and powdered milk is useless to them. maybe cheese? but still not the longest shelf life.) NOPE - the government ends up dumping what it produces. In examples like wheat crops they ship it and claim it as their good Samaritan ways, when it is just a ploy to make farmers more money.