Question

QUESTION 3

In Brazil, coffee beans are cultivated by a very large number of small farms that all produce beans of similar quality and taste at similar costs. Land is still plentiful, and the equipment required is affordable enough to allow new farming businesses to start up under current market conditions. However, better production techniques, especially alternatives to polluting fertilisers and deforestation, are needed in this industry. Using the theory and models of industry structure, examine this industry. Should government be worried about any aspect of how an industry with this market structure will perform?

Answer 1

• Market exhibits the features of perfectly competitive market as any firms can enter the market without incurring the sizeable cost of entry.
• But such market also produces negative externalities as the technology is enough plenty to deal with negative externalities.
• thus all firms tend to overproduce and breed the inefficient outcome.
• Thus government intervention is required here to internalize the negative external cost of production.
• Government norms and tax might help economic activities level which corresponds to efficient output.