Government Intervention for Agricultural Goods

•        Module Code (FC102)

•        Class/Group: group 4

•        Module Title: Microeconomics

•        Assessment Title: government intervention for agricultural goods

•        Tutor Name: Cameron Hodgson

•        Student ID Number: 2229824

•        Date of Submission: March 6th

Recently, there is widespread agreement that the traditional agriculture has changed in important ways during the past period. The traditional agriculture is a kind of management pattern that lets traditional elements as the main input factors. Compared with the traditional agriculture, the modern agriculture can be considered as the “industry” agriculture that means capital, technology and energy intensive agriculture. Meanwhile, modern agricultural supply is the basic product that supports foundation of the national economic construction and development. Therefore, most governments have to intervene in the market for agricultural products. Actually, no one should fail to take into account that the government interventions can bring profound effects on the agriculture. This essay will explain the government should not intervene the agriculture by introducing some types of intervention that could be used by government and evaluating their impacts on the market and famers from economic angle.

First and foremost, it goes without any saying that the price support is an important measure to intervene the agriculture. Price supports are defined as subsidies or price controls that are leveraged by the government to artificially increase or decrease prices, and thus alter the supply consumed/quantity demanded by individuals within the system. It can be divided into two types. One is that the government increases the price of goods thereby reaching the target price. To be specific, the government buy a large number of agricultural goods to keep high price. However, higher Prices encouraged extra supply, the inelastic demand for agricultural products results in a surplus of food. Therefore, the government has to buy this surplus. Meanwhile, the marginal social cost exceeds marginal social benefit. The overproduction must be bought of stored at high cost to maintain the target price. This is very inefficient and expensive. The other way is that the government gives subsidy to decrease the price of products thereby enhancing competitiveness. It means a payment made by the government to a producer for each unit produced. The subsidy is like a negative tax or decrease in cost. So the government subsidy makes the price of agricultural goods lower and increases the quantity produced. Nevertheless, the agricultural still results in inefficient overproduction. Although the subsidy lowers the price paid by consumers, it also increases the marginal cost that exceeds the market price. At the same time, marginal social cost exceeds marginal social benefits and a deadweight loss arises from overproduction. According to the analysis, the government subsidy should be considered inefficient. Moreover, it can bring negatives impacts on the agriculture in the world. The excess supplies are dumped onto world markets. The lower price of agricultural goods causes high demand in other counties. As a result, the local famers in other countries cannot acquire enough revenue.

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In addition, production quota is also a special method for the government to protect the agriculture. A production quota is an upper limit to the quantity of a good that may be produced in a specified period. It depends on whether it is set below or above the equilibrium quantity. If the quota exceeds the equilibrium quantity, nothing would happen. On the contrary, the production quota below the equilibrium quantity can cause large effects. It will result in a decrease in supply and a rise in the price. However, the production quota exists many drawbacks. It might lead to inefficient underproduction because of a decrease on marginal cost. Marginal social benefit at the quantity produced is equal to the market price, which has increase. Marginal social cost has decreased and is less than the market price. Therefore, marginal social benefit exceeds marginal social cost and a deadweight loss arise.

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Last but not least, the tariff is one of common government interventions. The tariff is a tax imposed on imported goods and services, which is used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers. To be extend, the high tariff on imported agricultural goods leads to the high price of overseas goods so that the demand for the products is limited. In the meantime, the imported goods which are substitutes for indigenous goods are more expensive than indigenous goods so that the imported goods are less competitive than the local goods. Therefore, the local agricultural products are often the essential consumer goods. However, this intervention always means low-efficiency. According to the following diagram, when there are a set of tariffs, the price of imported goods will increase. The consumer surplus will decrease and the producer surplus will increase. Meanwhile, there exists government revenue but these two small triangle parts represents deadweight loss. As a result, the price of goods increases and the efficiency of society decreases.

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To explain these government interventions in detail, some examples can be presented. Initially, the common agricultural policy(CAP) in Europe is one of typical examples. The CAP focus on increasing the productivity of agricultural goods, ensuring the fair and standard life for farmers to produce several safe agricultural products. In 2010, the CAP spent €57 billion on agricultural development, of which €39 billion was used in direct subsidies. Agricultural subsidy forms 40% of the EU budget. For example, CAP provides considerable support for European sugar producers, with subsidies of around £400 per ton, and with total subsidies of around $1.5b. The initial aim of the agricultural subsidy was to enable the growing EU sugar surplus to be exported at the prevailing world price, which was nearly 4p per pound by 2005, compared to the EU price of 15p. Estimates suggest that approximately 5m tonnes of excess EU sugar are dumped on world markets each year. As a result, the lower price of sugar from Europe undermined the market in the world, especially the markets of developing countries.