Impact of government regulation on the dairy industry in the United States

Abstract

The U.S. dairy industry is heavily regulated. The federal government established the first milk regulation under the Agricultural Adjustment Act in 1933. Subsequently, Congress passed the Act of 1935, the Agricultural Marketing Agreement Act of 1937, and the Agricultural Act in 1949. The 1937 and 1949 pieces of legislation have been the basis for milk regulation until now.

The federal government regulates the dairy industry by two programs: (1) the federal milk marketing order program, and (2) the federal price support program. These two programs regulate prices received by farmers. Some states also regulate retail prices for milk.

This paper examines the retail milk markets in three areas: (1) the impact of government milk regulation on retail prices for both fluid and manufacturing milk; (2) the impact of government milk regulation on consumers’ surplus, producers' surplus, and deadweight loss; and (3) the support prices for surplus manufacturing milk.

It was found that government dairy regulation tends to contribute to: (1) providing market stability in terms of minimum price variability and sufficient milk supply for consumers; and (2) guaranteeing high and uniform income for dairy farmers. These benefits, however, are at the expense of the consumers and taxpayers who are paying higher than pure competitive prices for all milk products. Some welfare transfer from the taxpayers to social programs is taking place under current government regulation. Net consumers' surplus is uncertain.

This thesis provides evidence which supports aspects of both the capture theory and market failure theory of the dairy industry in the United States.