Question

Government interventions in the market through policies and regulations are intended to address externalities and improve the welfare of the general public. However sometimes these interventions have “unintended” results that create externalities and/or reduce the welfare of market participants. Give two examples of this that affect agriculture indicating the intended economic outcomes and beneficiaries of the intervention and those who are negatively affected by the action. Be sure to provide evidence of the welfare loss that occurs.

Answer 1

Failure in government intervention will occur due to the resource allocation which is inefficient and leads to wastage of such resources. Negative externalities means the after effect in an industry or market that makes impact on the participants, but the same will not make an impact on the market price.

• Two examples of this that affect agriculture indicating the intended economic outcomes and beneficiaries of the intervention and those who are negatively affected by the action.

1.) Government used to intervene in the markets of agriculture when that market tends to fail. Agricultural market is the one which varies rapidly and too unpredictable and they will face very low income during that period. Hence, during this period government intervenes in agricultural markets for stabilizing supply of food and income of farmers.

European Economic Community (EEC) is an organization whose function is to assign agricultural as well as industrial contracts to various nations who pretend to be the member of EEC. They executed a policy named Common Agricultural Policy (CAP) in sake of farmers. This policy ensures a minimum price for the entire agricultural products.

In order to avoid foreign competition, tariffs are needed. But this policy faced unintended consequences later. As CAP ensures a minimum price for their products, farmers were self-motivated to produce more and more goods. Also, as per the policy, any surplus will be bought by the government themselves.

Hence, for more production, these farmers started to use artificial fertilizers. EEC had to buy more surplus products from these farmers. The same was dumped into large depositories. Agricultural foods was dumped in the global markets. This leads to the lowering of the income of these farmers.

2.) Government intervention will make high cost for subsidizing the agricultural field. In developed nations, more than $250 billion was spend by the government which is very very high. Subsidies were provided to these farmers with very low incentive and large plots in order to increase eco-friendly farming. Over supply became the result of minimum prices. Subsidies reduces their income by stopping the trade.

Thus, government intervention here makes a negative impact in the agricultural markets.