Post on 11-Apr-2015
Government InterventionGovernment Interventionin the Marketin the Market
Government Intervention in the MarketGovernment Intervention in the Market
The Control of Prices
The Control of Prices
THE CONTROL OF PRICESTHE CONTROL OF PRICES
• Equilibrium price and the absence of shortages and surpluses
• Minimum prices
– justification
– effects
• Equilibrium price and the absence of shortages and surpluses
• Minimum prices
– justification
– effects
Minimum price: price floorMinimum price: price floorP
Q O
Pe
S
D
Minimum price: price floorMinimum price: price floorP
Q O
Pe
minimumprice
Qd Qs
S
D
surplus
THE CONTROL OF PRICESTHE CONTROL OF PRICES
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Minimum prices– justification
– effects
– dealing with resulting surpluses
Maximum price: price ceilingMaximum price: price ceilingP
Q O
Pe
S
D
Maximum price: price ceilingMaximum price: price ceilingP
Q O
Pe
S
D
Qs Qd
maximumprice
shortage
THE CONTROL OF PRICESTHE CONTROL OF PRICES
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices
THE CONTROL OF PRICESTHE CONTROL OF PRICES
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
THE CONTROL OF PRICESTHE CONTROL OF PRICES
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
– effects
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
– effects
THE CONTROL OF PRICESTHE CONTROL OF PRICES
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
– effects
– dealing with resulting shortages
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
– effects
– dealing with resulting shortages
THE CONTROL OF PRICESTHE CONTROL OF PRICES
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
– effects
– dealing with resulting shortages
– rationing
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
– effects
– dealing with resulting shortages
– rationing
THE CONTROL OF PRICESTHE CONTROL OF PRICES
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
– effects
– dealing with resulting shortages
– rationing
– black markets
• Minimum prices– justification
– effects
– dealing with resulting surpluses
• Maximum prices– justification
– effects
– dealing with resulting shortages
– rationing
– black markets
P
QO
Pe
D
S
Effect of price control on black-market pricesEffect of price control on black-market prices
P
QO
Pg
Pe
D
S
Effect of price control on black-market pricesEffect of price control on black-market prices
P
QO
Pg
Pe
Qs Qd
D
S
Effect of price control on black-market pricesEffect of price control on black-market prices
P
QO
Pb
Pg
Pe
Qs Qd
D
S
Effect of price control on black-market pricesEffect of price control on black-market prices
P
QO
Pb
Pg
Pe
Qs Qd
D
S
Effect of price control on black-market pricesEffect of price control on black-market prices
INDIRECT TAXESINDIRECT TAXES
• Specific and ad valorem taxes
• Effects on supply curve
• Specific and ad valorem taxes
• Effects on supply curve
S
P
Q O
Effect of a tax on the supply curveEffect of a tax on the supply curve
S + specific tax
S
amount ofspecific tax
P
Q O
Effect of a tax on the supply curveEffect of a tax on the supply curve
S + ad valorem tax
S
P
Q O
Effect of a tax on the supply curveEffect of a tax on the supply curve
INDIRECT TAXESINDIRECT TAXES
• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
INDIRECT TAXESINDIRECT TAXES
• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
– the producers' share
– the consumers' share
• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
– the producers' share
– the consumers' share
S
P
Q O
P1
Q1
D
Effect of a tax on price and quantityEffect of a tax on price and quantity
S + tax
S
O
P1 + tax
P1
P2
Q1Q2
D
P
Q
Effect of a tax on price and quantityEffect of a tax on price and quantity
INDIRECT TAXESINDIRECT TAXES
• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
– the producers' share
– the consumers' share
• Elasticity and the incidence of taxation
• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
– the producers' share
– the consumers' share
• Elasticity and the incidence of taxation
S + tax
S
O
P1
Q1
D
P
Q
Incidence of tax: inelastic demandIncidence of tax: inelastic demand
S + tax
S
O
P1
P2
Q2 Q1
D
P
Q
Incidence of tax: inelastic demandIncidence of tax: inelastic demand
S + tax
S
O
P1
P2
Q2 Q1
D
CONSUMERS’SHARE
CONSUMERS’SHARE
P2 - t P2 - t PRODUCERS’ SHAREPRODUCERS’ SHARE
P
Q
Incidence of tax: inelastic demandIncidence of tax: inelastic demand
S + tax
S
O
P1
Q1
D
P
Q
Incidence of tax: elastic demandIncidence of tax: elastic demand
S + tax
S
O
P1
P2
Q1
D
Q2
P
Q
Incidence of tax: elastic demandIncidence of tax: elastic demand
S + tax
S
O
P1
P2
Q2 Q1
D
CONSUMERS’SHARE
CONSUMERS’SHARE
P
Q
Incidence of tax: elastic demandIncidence of tax: elastic demand
S + tax
S
O
P2 - t
P1
P2
Q2 Q1
D
CONSUMERS’SHARE
CONSUMERS’SHARE
PRODUCERS’ SHARE
PRODUCERS’ SHARE
P
Q
Incidence of tax: elastic demandIncidence of tax: elastic demand
S + tax
S
O
P1
Q1
D
P
Q
Incidence of tax: inelastic supplyIncidence of tax: inelastic supply
S + tax
S
O
P1
P2
Q1
D
Q2
P
Q
Incidence of tax: inelastic supplyIncidence of tax: inelastic supply
S + tax
S
O
P1
P2
Q2 Q1
D
P
Q
CONSUMERS’ SHARECONSUMERS’ SHARE
Incidence of tax: inelastic supplyIncidence of tax: inelastic supply
S + tax
S
O
P2 - t
P1
P2
Q2 Q1
D
P
Q
CONSUMERS’ SHARECONSUMERS’ SHARE
PRODUCERS’ SHAREPRODUCERS’ SHARE
Incidence of tax: inelastic supplyIncidence of tax: inelastic supply
S + taxP
Q O
P1
Q1
D
S
Incidence of tax: elastic supplyIncidence of tax: elastic supply
S + taxP
Q O
P1
P2
Q1
D
Q2
S
Incidence of tax: elastic supplyIncidence of tax: elastic supply
S + taxP
Q O
P1
P2
Q2 Q1
D
SCONSUMERS’
SHARECONSUMERS’
SHARE
Incidence of tax: elastic supplyIncidence of tax: elastic supply
S + taxP
Q O
P2 - t
P1
P2
Q2 Q1
D
SCONSUMERS’
SHARECONSUMERS’
SHARE
PRODUCERS’ SHARE
PRODUCERS’ SHARE
Incidence of tax: elastic supplyIncidence of tax: elastic supply
S + tax
S
O
P2 - t
P1
P2
Q2 Q1
D
P
Q
CONSUMERS’ SHARECONSUMERS’ SHARE
PRODUCERS’ SHAREPRODUCERS’ SHARE
Incidence of tax: inelastic supplyIncidence of tax: inelastic supply
INDIRECT TAXESINDIRECT TAXES
• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
– the producers' share
– the consumers' share
• Elasticity and the incidence of taxation
• Implications for tax policy
• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
– the producers' share
– the consumers' share
• Elasticity and the incidence of taxation
• Implications for tax policy
Government Intervention in the MarketGovernment Intervention in the Market
Government Rejection of
Market Allocation
Government Rejection of
Market Allocation
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
P
Q
S
DP0
Qs Qdshortage
The demand for and supply of hospital treatmentThe demand for and supply of hospital treatment
P
Q
Pe
S
DP0
Qs Qdshortage
The demand for and supply of hospital treatmentThe demand for and supply of hospital treatment
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• comparison with legal prices
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• comparison with legal prices
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
P
Q
Plegal
Slegal
Dlegal
QlegalO
The market for an illegal drugThe market for an illegal drug
P
Q
Plegal
Slegal
Dlegal
Qlegal
Sillegal
O
The market for an illegal drugThe market for an illegal drug
P
Q
Plegal
Slegal
Dlegal
Qlegal
Sillegal
Dillegal
O
The market for an illegal drugThe market for an illegal drug
P
Q
Plegal
Slegal
Dlegal
Qlegal
Sillegal
Dillegal
Pillegal
QillegalO
The market for an illegal drugThe market for an illegal drug
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• comparison with legal prices
– comparison of prohibition and taxation
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• comparison with legal prices
– comparison of prohibition and taxation
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• comparison with legal prices
– comparison of prohibition and taxation• effects on demand and supply
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• comparison with legal prices
– comparison of prohibition and taxation• effects on demand and supply
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• comparison with legal prices
– comparison of prohibition and taxation• effects on demand and supply• effects on price
• Providing goods free to consumers– justification– effects– the case of health care
• problems of shortages• methods of dealing with shortages
• Making products illegal– justification– the market for illegal products
• comparison with legal prices
– comparison of prohibition and taxation• effects on demand and supply• effects on price
GOVERNMENT REJECTION OF MARKET ALLOCATIONGOVERNMENT REJECTION OF MARKET ALLOCATION
Government Intervention in the MarketGovernment Intervention in the Market
Agriculture and Agricultural Policy
Agriculture and Agricultural Policy
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Why governments intervene in agriculture– to reduce price fluctuations
– to raise farm incomes
– to protect rural communities
– to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations– fluctuations in the harvest
– low price elasticity of demand
• Why governments intervene in agriculture– to reduce price fluctuations
– to raise farm incomes
– to protect rural communities
– to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations– fluctuations in the harvest
– low price elasticity of demand
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Elasticities of demand for various foodstuffs (UK)Elasticities of demand for various foodstuffs (UK)
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Elasticities of demand for various foodstuffs (UK)Elasticities of demand for various foodstuffs (UK)
P
Q O
P1
D
Sa1
Inelastic demand for foodInelastic demand for food
P
Q O
P1
P2
D
Sa1Sa2
Inelastic demand for foodInelastic demand for food
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Why governments intervene in agriculture– to reduce price fluctuations
– to raise farm incomes
– to protect rural communities
– to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations– fluctuations in the harvest
– low price elasticity of demand
• Causes of declining farm incomes
• Why governments intervene in agriculture– to reduce price fluctuations
– to raise farm incomes
– to protect rural communities
– to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations– fluctuations in the harvest
– low price elasticity of demand
• Causes of declining farm incomes
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Why governments intervene in agriculture– to reduce price fluctuations
– to raise farm incomes
– to protect rural communities
– to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations– fluctuations in the harvest
– low price elasticity of demand
• Causes of declining farm incomes– low income elasticity of demand
• Why governments intervene in agriculture– to reduce price fluctuations
– to raise farm incomes
– to protect rural communities
– to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations– fluctuations in the harvest
– low price elasticity of demand
• Causes of declining farm incomes– low income elasticity of demand
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Why governments intervene in agriculture– to reduce price fluctuations
– to raise farm incomes
– to protect rural communities
– to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations– fluctuations in the harvest
– low price elasticity of demand
• Causes of declining farm incomes– low income elasticity of demand
– increases in supply
• Why governments intervene in agriculture– to reduce price fluctuations
– to raise farm incomes
– to protect rural communities
– to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations– fluctuations in the harvest
– low price elasticity of demand
• Causes of declining farm incomes– low income elasticity of demand
– increases in supply
Source: Agriculture in the European Union, European Economy (European Commission)
Yields of selected crops (100 kg/hectare)Yields of selected crops (100 kg/hectare)
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Elasticities of demand for various foodstuffs (UK)Elasticities of demand for various foodstuffs (UK)
P
Q O
P1
D1
S1
Q1
Decline in food prices over timeDecline in food prices over time
P
Q O
P1
S2
D2
P2
Q1 Q2
D1
S1
Decline in food prices over timeDecline in food prices over time
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Types of government intervention in agriculture– buffer stocks
– subsidies
– high fixed prices
– reducing supply
– structural policies
• Buffer stocks– buffer stocks to stabilise prices
• Types of government intervention in agriculture– buffer stocks
– subsidies
– high fixed prices
– reducing supply
– structural policies
• Buffer stocks– buffer stocks to stabilise prices
P
Q O
Pg
D
Qd
Buffer stocks to stabilise pricesBuffer stocks to stabilise prices
P
Q O
Pg
D
Sa1
Qs1Qd
Bought into buffer stock
Buffer stocks to stabilise pricesBuffer stocks to stabilise prices
P
Q O
Pg
D
Qs2Qd
Released from buffer stock
Sa2
Buffer stocks to stabilise pricesBuffer stocks to stabilise prices
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Types of government intervention in agriculture– buffer stocks
– subsidies
– high fixed prices
– reducing supply
– structural policies
• Buffer stocks– buffer stocks to stabilise prices
– buffer stocks to stabilise farm incomes
• Types of government intervention in agriculture– buffer stocks
– subsidies
– high fixed prices
– reducing supply
– structural policies
• Buffer stocks– buffer stocks to stabilise prices
– buffer stocks to stabilise farm incomes
P
Q O
D
aP1
Buffer stocks to stabilise incomesBuffer stocks to stabilise incomes
P
Q O
D
Y
aP1
Pd = 1
Buffer stocks to stabilise incomesBuffer stocks to stabilise incomes
P
Q O
D
Sa2
Q2Q1
Sa1
Y
aP1
Buffer stocks to stabilise incomesBuffer stocks to stabilise incomes
P
Q O
D
Sa2
Q2Q1
Sa1
Y
aP1
P2
Buffer stocks to stabilise incomesBuffer stocks to stabilise incomes
P
Q O
D
Sa2
Q2Q1
Sa1
Q2
Y
aP1
P2
P2
bc
Bought into buffer stock
Buffer stocks to stabilise incomesBuffer stocks to stabilise incomes
P
Q O
D
Sa3
Q3 Q1
Sa1
Y
aP1
Buffer stocks to stabilise incomesBuffer stocks to stabilise incomes
P
Q O
D
Sa3
Q3 Q1
Sa1
Y
aP1
P3
Buffer stocks to stabilise incomesBuffer stocks to stabilise incomes
P
Q O
D
Sa3
Q3 Q1
Sa1
Q3
Y
aP1
P3
P3
de
Released from buffer stock
Buffer stocks to stabilise incomesBuffer stocks to stabilise incomes
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Subsidies
– effects on price and output
– the incidence of a subsidy
• Subsidies
– effects on price and output
– the incidence of a subsidy
Effect of subsidies on foodstuffs in which the country is self-sufficientEffect of subsidies on foodstuffs in which the country is self-sufficient
P
Q O
D
Qe
Pe
S
P
Q O
D
Qe
Pe
S + subsidy
S
Effect of subsidies on foodstuffs in which the country is self-sufficientEffect of subsidies on foodstuffs in which the country is self-sufficient
P
Q O
D
Q1Qe
Pe
Pm
S + subsidy
S
Effect of subsidies on foodstuffs in which the country is self-sufficientEffect of subsidies on foodstuffs in which the country is self-sufficient
P
Q O
D
Q1Qe
Pe
Pg
Pm
S + subsidy
S
Sub
sidy
Effect of subsidies on foodstuffs in which the country is self-sufficientEffect of subsidies on foodstuffs in which the country is self-sufficient
P
Q O
D
Q1Qe
Pe
Pg
Pm
S + subsidy
S
Sub
sidy
Effect of subsidies on foodstuffs in which the country is self-sufficientEffect of subsidies on foodstuffs in which the country is self-sufficient
Effect of subsidies on foodstuffs which are partly importedEffect of subsidies on foodstuffs which are partly imported
P
Q O
D
Pw
Sdomestic
Sworld
P
Q O
D
Pw
Sdomestic
Sworld
QS1Qd
Imports
Effect of subsidies on foodstuffs which are partly importedEffect of subsidies on foodstuffs which are partly imported
P
Q O
D
Qd
Pw
QS2
S + subsidy
Sdomestic
Sworld
QS1Imports
Effect of subsidies on foodstuffs which are partly importedEffect of subsidies on foodstuffs which are partly imported
P
Q O
D
QS2Qd
Pw
Pg
S + subsidy
Sdomestic
Sworld
QS1
Effect of subsidies on foodstuffs which are partly importedEffect of subsidies on foodstuffs which are partly imported
P
Q O
D
QS2Qd
Pw
Pg
S + subsidy
Sdomestic
Sworld
QS1
Effect of subsidies on foodstuffs which are partly importedEffect of subsidies on foodstuffs which are partly imported
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
Minimum price where some of the product is importedMinimum price where some of the product is imported
P
Q O
Pw
EU supply
QS1Qd1
EU demand
Imports
P
Q O
Pw
Pt
EU supply
QS1Qd1
EU demand
Imp
ort
levy
Minimum price where some of the product is importedMinimum price where some of the product is imported
AMOUNT PAIDIN IMPORT
LEVIES
AMOUNT PAIDIN IMPORT
LEVIES
P
Q O QS2
Pw
Pt
EU supply
QS1Qd1
EU demand
Imp
ort
levy
ImportsQd2
Minimum price where some of the product is importedMinimum price where some of the product is imported
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
– foodstuffs where the country is self-sufficient
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
– foodstuffs where the country is self-sufficient
P
Q O QS1Qd1
DEU
SEU
Pw
ba
Exports
Minimum prices for a product where the EU is self-sufficientMinimum prices for a product where the EU is self-sufficient
COSTCOSTREVENUE FROMREVENUE FROM
SALE OF SURPLUSSALE OF SURPLUSON WORLD MARKETON WORLD MARKET
P
Q O QS2
Pw
Pi
SEU
QS1Qd2
Qd1
DEU
a bf c
Surplus
NET COSTNET COST
Intervention pricede
Minimum prices for a product where the EU is self-sufficientMinimum prices for a product where the EU is self-sufficient
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
– foodstuffs where the country is self-sufficient
• Reductions in supply
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
– foodstuffs where the country is self-sufficient
• Reductions in supply
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
– foodstuffs where the country is self-sufficient
• Reductions in supply
– quotas
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
– foodstuffs where the country is self-sufficient
• Reductions in supply
– quotas
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
– foodstuffs where the country is self-sufficient
• Reductions in supply
– quotas
– taking land out of use (e.g. set aside)
• Subsidies
– effects on price and output
– the incidence of a subsidy
• High minimum prices
– foodstuffs where the country is a net importer
– foodstuffs where the country is self-sufficient
• Reductions in supply
– quotas
– taking land out of use (e.g. set aside)
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Justification of the CAP
– assured supplies of food
– support for farm incomes
– growth in agricultural productivity
– stable agricultural prices
– reasonable prices for consumers.
• Justification of the CAP
– assured supplies of food
– support for farm incomes
– growth in agricultural productivity
– stable agricultural prices
– reasonable prices for consumers.
The cost of price and other market support for agriculture in the EUThe cost of price and other market support for agriculture in the EU
Source: Agriculture in the European Union, European Economy (European Commission)
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Criticisms of the CAP
– agricultural surpluses
• static costs
• Criticisms of the CAP
– agricultural surpluses
• static costs
P
Q O
Pe
S
D
The cost to the taxpayer of high fixed pricesThe cost to the taxpayer of high fixed prices
P
Q O
Pe
Pi
S
D
Qd Qs
a b
Surplus
The cost to the taxpayer of high fixed pricesThe cost to the taxpayer of high fixed prices
P
Q O
Pe
Pi
S
D
c
ba
d
Qd Qs
Surplus
COST TOTHE
TAXPAYER
COST TOTHE
TAXPAYER
The cost to the taxpayer of high fixed pricesThe cost to the taxpayer of high fixed prices
P
Q O
Pe
S
D
Pf
Pc
Subsidy
Q1Q2
a
The cost to the taxpayer of subsidiesThe cost to the taxpayer of subsidies
b
P
Q O
Pe
Pf
S
D
a
bPc
COST TOTHE TAXPAYER
COST TOTHE TAXPAYER
Q1Q2
The cost to the taxpayer of subsidiesThe cost to the taxpayer of subsidies
Source: Agriculture in the European Union, European Economy (European Commission)
Unequal support given to different agricultural products in the EU: 2001Unequal support given to different agricultural products in the EU: 2001
Source: Agriculture in the European Union, European Economy (European Commission)
Unequal support given to different agricultural products in the EU: 2001Unequal support given to different agricultural products in the EU: 2001
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Criticisms of the CAP (cont.)
– irrational relative prices
– removes disciplines of markets
– redistributive effects
– effects on the environment
– effects on the rest of the world
• effects of import levies
• effects of export subsidies
• Criticisms of the CAP (cont.)
– irrational relative prices
– removes disciplines of markets
– redistributive effects
– effects on the environment
– effects on the rest of the world
• effects of import levies
• effects of export subsidies
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP
– price reductions
– production quotas
– set aside
– diversification; low-intensity farming
– income support
– the MacSharry reforms
• effects on surpluses
• Reforming the CAP
– price reductions
– production quotas
– set aside
– diversification; low-intensity farming
– income support
– the MacSharry reforms
• effects on surpluses
c
ba
d
P
Q O
P1
S1
D
Original surplus
Qs1Qd1
FARMERS'ORIGINAL INCOME
FARMERS'ORIGINAL INCOME
Effect of the MacSharry reforms on cereal surplusesEffect of the MacSharry reforms on cereal surpluses
P
Q O
P1
P2
S1
Dc
ba
d
Reduction inintervention
price
Qs1Qd1
Effect of the MacSharry reforms on cereal surplusesEffect of the MacSharry reforms on cereal surpluses
P
Q O
P1
P2
S1
D
S2
c
ba
d
Effect ofSet-aside
Qs1Qd1
Effect of the MacSharry reforms on cereal surplusesEffect of the MacSharry reforms on cereal surpluses
a b
c
P
Q O
P1
P2
S1
D
S2
Qs2Qs1
Qd2Qd1
c
ba
d
Reduced surplus
FARMERS'REDUCEDINCOME
FARMERS'REDUCEDINCOME
Effect of the MacSharry reforms on cereal surplusesEffect of the MacSharry reforms on cereal surpluses
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000• the issue of EU enlargement
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000• the issue of EU enlargement
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000• the issue of EU enlargement• proposals
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000• the issue of EU enlargement• proposals
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000• the issue of EU enlargement• proposals• subsequent events
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000• the issue of EU enlargement• proposals• subsequent events
AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000• the issue of EU enlargement• proposals• subsequent events
– The 2002 reform proposals
• Reforming the CAP– price reductions– production quotas– set aside– diversification; low-intensity farming– income support– the MacSharry reforms
• effects on surpluses• continuing problems
– Agenda 2000• the issue of EU enlargement• proposals• subsequent events
– The 2002 reform proposals