The Problem of Instability in the Agricultural Product Market - Essay Example

?Government Intervention in the Market for Various Agricultural Products Introduction Current prevailing trends are for governments to allow for freemarket economies under their jurisdictions. This means that the forces of supply and demand are left to play out in determining the prices of goods and services in the market, and the government can only come in to ensure adherence to contracts or secure private property. This is because in an environment of free competition, the consumers end up gaining from lower prices as entrepreneurs fight to gain their favour (Patselas, 2001, 2). However, when it comes to the market for agricultural products, there is a real fear that people might go hungry when prices are high or there can be a lot of waste when the highly perishable products are produced in surplus thus resulting in losses for farmers and entrepreneurs. This situation may especially prevail when foreign agricultural products are allowed indiscriminately into the market (Dommen, & Mabbs-Zeno, 1989, 98). The government is therefore sometimes forced to maintain a tough balancing act between a free market economy and intervention when the need arises in this particular market to prevent the adverse extremities from occurring (Rothbard, 2008). This paper discusses the circumstances under which such a government intervention can take place with particular reference to the case of the United States of America. Factors Resulting in Government Intervention in the United States The United States government has for long been involved in attempts to enhance profitability in farms through deliberate policies and programs. This is usually done through measures such as regulation, protection of trade, promotion of products and price control and support of income. The government controls the types of food produced, the volume in which they are produced, the volume exported and those imported. This is mainly because food is crucial for life sustenance and political stability (Friedman & Sunder, 1994, 48). In 1988 for example the government injected $37,733,526,000 into the agricultural sector. This was done in the interest of provision of loans, product promotion and market stabilization (Dommen, & Mabbs-Zeno, 1989, 98). This was all in an effort to create jobs and ensure high quality and health safety for the consumers. Interestingly, this money came from taxes imposed on the same agricultural sector. The jury is still out on whether the attempt to create jobs is really succeeding considering that the same money taken from farmers in the form of taxes could be used by the same farmers to create jobs. This argument has however not deterred the government from bulldozing on with this policy (Robbins, 1976, 144). The problem with taxation is that it pushes prices of commodities up thus eroding the buying power of the consumer. However, this has to be counter-balanced with the reality that poor quality products that do not adhere to health standards also push up medical bills for the same consumers who complain if prices of commodities go up. The government prefers higher health standards rather than very low food prices (Dommen, & Mabbs-Zeno, 1989, 98). The dynamics of government taxation and the prices of commodities are best expressed in figure 1 below. Figure 1 Change of Equilibrium Due to Tax s tax s 1 P r i p tax c p 1 e (p) D q tax q 1 Quantity (q) In the figure above, the old price [p1] increases due to tax [p tax] while to old quantity [q1] decreases to a smaller amount [q tax]. As a result of these changes, the old supply curve [s1] shifts vertically to the new one [s tax]. Note that the difference between p1 and p tax. This difference is equal to the amount of tax levied which the sellers pass on directly to the consumers (Plott, 1982, 1485). The consumers are therefore left with the option of buying the old quantity at a higher price or a smaller quantity at the old price. The net effect of this taxation is that less of the particular product is sold than before since in many cases the buyers will opt for the latter option given that there is no increase in their income. This option is mostly used to control the sale of tobacco which is a direct cause of lung cancer among smokers (Plott, 1982, 1485). High Minimum Prices This is a method that the government uses to regulate the market when prices for goods are so low that they cannot sustain farmers. Known as price floors, they are artificially set up minimum prices for goods on offer. In most cases, this minimum price is above the prevailing market price (Adams & Brock, 2005, 22). The effect of setting a price floor is quite similar to that of the tax equilibrium shown in figure 1. The main difference is that when price floors are introduced, the quantity supplied is much higher than the quantity demanded in the market. The suppliers obviously cash in on the higher prices to try to sell as much as they can. Buyers on the other hand find the prices high and so they can only buy a limited amount. The end result is that there is oversupply in the market thus leading to a surplus. Ultimately, a surplus leads to waste and losses on the part of the suppliers, especially for perishable goods (Adams & Brock, 2005, 22). Lump Sum Subsidies One of the uses of taxes levied on farm produce is to provide subsidies to farmers. These are provided in the form of transport, fertilizer, irrigation, export, marketing and promotion subsides. However, in sum cases a lump sum subsidy is provided to cover any or all of these areas. A lump sum subsidy is a fixed amount given to all farmers covered indiscriminate of their particular unique or individual specific circumstances (Dommen, & Mabbs-Zeno, 1989, 98). Though such a lump sum is set after considering what could be the average costs per farmer under the circumstances. The assumption is that such an amount more or less covers the intended purpose. The problem with such subsidies is that they stimulate production and subsequently, supply (Noussair, 1995, 426). Since this supply is not limited by normal market forces, it results directly into a surplus in the market. The effect is therefore quite similar to that of minimum prices especially when such subsidies are coupled, which means they are tied to production (Sumner, 2005, 1229). Have some subsidies have the opposite effect. Market and export subsidies help to create an extra market for the subsidized goods. This helps to push up demand and thus create a new equilibrium favorable for the sellers (Noussair, 1995, 426). Export subsidies for instance help sellers to access external markets yet still compete there effectively due to their subsidized prices. In this way goods that would have otherwise cost too much in the international market are cushioned by subsidized costs so that they still retail at a price acceptable to the buyers (Noussair, 1995, 426). Such subsidies help to push surplus production into either the local or international market. Whatever the case, the aim of awarding lump sum subsidies is to stimulate the market in order to spur production or stability in the sector. Subsidies also help to mitigate the problems experienced in the agriculture sector which are mainly shortage of or surplus food in the market (Ballenger, 1987, 144). One obvious disadvantage of subsidies is that they help keep joyriders in business. Joy riders or free loaders are individuals and organizations that are not performing well enough in the market to survive on their own (Noussair, 1995, 426). When subsidies are given to such businesses, it means that money is taken from the bigger and more efficient businesses to help the strugglers going (Dommen, & Mabbs-Zeno, 1989, 98). Conversely, in the world of business, survival for the fittest is the silent rule. As Henry Hazlitt notes, it is important that old and inefficient companies die out to allow new efficient ones to grow faster. When this natural selection happens then labor and capital is liberated from the black holes to help the efficient newcomers to thrive (Ballenger, 1987, 144). Conclusion From the foregoing, it is quite obvious that the problem of instability in the agricultural product market is one that cannot successfully be left to the forces of the market. Government is force to initiate intervention measures to help stabilize this sector, since it is crucial to human survival and by extension, the very survival of the government. A hungry population is very prone to revolt, and this is a reality that the government must avoid at all costs. Between the use of high minimum prices and lump sum subsidies, the latter method is more effective than the former, since it helps to stimulate the local or international market for agricultural products to be sold under nearly natural conditions. However as noted, this must be done with moderation since overdoing it also results in the undesirable eventuality of surplus in the market. References Adams W., & J. Brock (eds), 2005, The Structure of American Industry, 11th Edition, Prentice Hall: New Jersey, p 22. Ballenger, N., ed, 1987, Government Intervention in Agriculture: Measurement, Evaluation and Implications for Trade Negotiations, United States Department of Agriculture: Economic Research Service, Washington, D.C.  Dommen, Arthur & Carl Mabbs-Zeno, 1989.  Subsidy Equivalents: Yardsticks of Government Intervention in Agriculture for the GATT,  United States Department of Agriculture: Washington D.C. Friedman, D. and Sunder, S., 1994, Experimental Methods: A Primer for Economists, Princeton University Press: Princeton, NJ. Noussair, C. N., Plott, C. R. and Riezman, R. G. (1995), An Experimental Investigation of the Patterns of International Trade‘, American Economic Review, 85, p 426. Patselas, Christian, 2001, Hayek's Liberalism and Its Origins: His Idea of Spontaneous Order and the Scottish Enlightenment, New York: Routledge. Plott, C. R. (1982), Industrial Organization Theory and Experimental Markets‘, Journal of Economic Literature, 20, p 1485. Robbins, Lord,  1976,  Political Economy: Past and Present,  Columbia University Press: New York. Rothbard, Murray N. , 2008, “The Concise Encyclopedia of Economics”, Retrived on 28/2/2010 from: < www.econlib.org/library/Enc/FreeMarket.html> Sumner, D. A. (2005), Production and Trade Effects of Farm Subsidies: A Discussion‘, American Journal of Agricultural Economics, 87(5), pp. 1229. Read More