As with the price support system, farmers sell more output and receive more revenue. Unlike price supports, there is no surplus associated with the target price. A potential surplus does develop, but it is sold on the market at a price below the market equilibrium price. Government must pay farmers the difference between the target price and the price for which the product is sold by making a deficiency payment. The money for this deficiency payment comes from the taxpayer.
Domestic buyers pay less for the product than they do under a system of price supports.
E. Output Constraints 1. In order to decrease either excess supply or deficiency payments, government may enact a program of output constraints. In order to participate in the farm program, farmers are paid to take part of their land out of production. Output constraints generally do not decrease output by the desired amount. Farmers take their less productive land out of production and use the remaining-acreage more intensively.