Big Government Cheese

As I was catching up on some of my favorite podcasts this weekend, I learned of the time when President Jimmy Carter decided to help American dairy farmers by buying lots and lots of cheese. The podcast from Planet Money, called Big Government Cheese, details the story of how the government, in order to raise the price of milk, bought tons and tons of storable dairy products like butter and cheese. By offering to buy any amount of cheese at a certain price, the government created a price floor which increased the demand for cheese and, resultantly, the demand for and price of milk. This program, clearly inefficient, cost taxpayers over $2 billion and created a huge problem for the government in terms of storage. Since the government had a huge surplus of stored cheese, they had the equivalent of 2 pounds for every American stored in caves in Kansas, they began giving it to food banks to avoid flooding the market. As a result, millions of Americans began eating “government cheese.”

This story reminded me of many things we’ve talked about in class, but most specifically of externalities. By artificially setting the price for milk through buying cheese, the government manipulated the dairy market and crowded out potential milk drinkers because the price was too high. When the government realized they had created this problem, they paid farmers to stop producing milk to decrease supply and started marketing campaigns like “got milk” to increase demand.  For this reason, the government created a positive consumption externality because the purchasing(consumption) of all this cheese led to the creation of public health campaigns to increase milk consumption which is beneficial to public health.