Question

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

Based on the information it is clear that industry is characterized by a perfectly competitive market. There is easy entry and exit in this market.

Though it is a perfectly competitive market, it is not efficient owing to the presence of negative externalities.

Market failure instances are abundant here.

Thus, the government intervention in the forms of the pigou tax and norms must be there to drive the economic activities towards the efficient level.

The market will tend to overproduce without government intervention. Thus, government must be worried about the market structure or industry activities.