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

The industry is perfectly competitive due to lack of entry barriers, homogeneous products and large number of small firms in industry.

The government should be worried as this industry is unregulated and has wafer thin margins which could lead to disruption and shutdown of many firms and create large scale unemployment affecting macroeconomic indicators like inflation and real GDP both.

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