Stabilization paradox in agriculture and anti-protection effect of Wheat floor price policy in Iran

Nowadays, political and national requirements and concerns have caused governments to intervene extensively in the markets of agricultural products. Floor price is one of the policies that have been widely used in agriculture of developing countries and still remained common. Although, there was some criticism on application of floor prices in the past, but these criticisms often emphasized on allocative inefficiency. By providing a theoretical model and a concrete example of Iran's wheat market, present study introduces two paradoxes (paradoxes of stabilization and equity) challenging the efficiency of this policy, even in achieving the objectives of policy-makers and proponents of government intervention, i.e. increasing production, stabilizing the economy, and improvement of income distribution. For this purpose, initially a theoretical model has been proposed in spite of its simplicity provides some important and new predictions about the effect of floor prices on supply - price relation under price uncertainty in the presence of intermediate agents. Then, the model is tested empirically and various aspects of the subject are discussed. The results confirm that government intervention in agricultural pricing, is not advisable at least without considering market prices, price expectations, the role of intermediate agents, and some revision of the calculation and practice methods.