The United States subsidizes crop insurance for farmers that pays the farmers when their crops are destroyed or prices are below expectations. It is currently one of the major sticking points in the Farm Bill being considered by Congress. Economist Bruce Babcock has discovered a major surprise about crop insurance. It would be cheaper to give it away.
Here’s why, according to Babcock. Government subsidies have encouraged private insurance companies to offer increasingly gold-plated forms of crop insurance. The policies don’t just cover the risk of bad weather anymore. They guarantee a farmer’s income, covering all kinds of risks, including the risk that corn prices might fall.
Subsidies make these policies artificially cheap, so farmers have been buying more and more of them. As Babcock puts it, “it is fundamental tenet in economics that people have an insatiable appetite for products they can buy with someone else’s money.
Now it would be cheaper still to get rid of the program altogether (and there is a good economic argument for doing so) but if we have to have government involvement in crop insurance, maybe we should just give it away.