The government or governing body of countries has always been intervening with how the economy operates. An open economy is where the market in free from external intervention and all decisions are based on the supply and demand, but it only exists in theory. In the real world, there would always be a certain extend of intervention from the government. Government intervention is an action taken from the government that alter or change economic activeness, supply ability, and the unconstrained decisions made through normal market trade, to stabilise the market. Government intervention could take place through many ways, like taxation, production quotas, subsidies and price capping.
According to an article by David Gow , ‘UK to dismiss Common Agricultural reforms as inadequate' (http://www.guardian.co.uk/world/2003/jun/26/eu.politics1?INTCMP=SRCH), the United Kingdom government is against the European Commission’s decision to reform the Common Agricultural Policy, which they expect that will enable a 9% cut in government spending on CAP. Caroline Spelman, UK’s environment secretary, said: "We're in a situation where there are global problems with food security, economic uncertainty and the loss of biodiversity. Reforming the CAP is the best opportunity in a generation to take a major step forward … but we're worried that the commission's proposals will be far too backward-looking and this precious opportunity will be lost."
So what is Common Agricultural Policy? Does it benefit the society, or does more harm than good? The Common Agricultural Policy is a form of price regulation and subsidy that is implemented in the European Union. It was formed to stabilise the income of farmers by setting a ceiling price or a floor price for agricultural product. This will provide a guaranteed price for the farmers for their crops. Otherwise, farmers would not be able to respond to consumer demands effectively due to the fluctuating prices.
Assuming the CAP has set the price of agricultural goods above the equilibrium point, this is good news for farmers. The producer surplus will increase, while consumer surplus will decrease. The higher price has guaranteed a higher income for their produce and this will encourage the farmers to plant more crops, causing the supply in the market to increase. However, the supply for crops may not change in the short run as it takes times for the farmers to plant more crops and for the crops to grow. As for the consumers, the higher price might discourage them from buying the products, and demand falls. As a result, there would be overproduction in the market.
If the CAP has set the price of agricultural goods below the equilibrium point, consumers would be the one benefitting from it. Consumer surplus will increase, while producer surplus will decrease. And since the price has been set below the equilibrium price, it is then cheaper for consumers to purchase. Demand would go up as well since people could afford more of the good and those who could not afford before could afford it now. There would an underproduction in the market, as farmers might have lesser incentives to produce the crops and the demand is higher than the supply.
Though the Common Agricultural Policy, farmers will also receive subsidies to aid their production. Subsidy is ‘a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction.’ Bruce Stokes explained in his article that the subsidy amount received is based on how environmental friendly their practices are. As the farmer’s cost of production has reduced, the farmers will tend to increase their supply. As a result, price will drop and consumers will benefit.
And then there is a method which the government uses to intervene when there is an overproduction or an underproduction. It is called the Buffer Stock Scheme. The Buffer Stock Scheme is a part of the Common Agricultural Policy’s method of stabilising prices. As seen in the graph, the government buys in the excess amount of agricultural products at S2 from the farmers and releases it into the market when there is a shortage of supply at S1. Both actions will push the supply back to S, while the price and quantity is stabilised back at P and Q.
The Buffer Stock Scheme is a form of subsidy for farmers, as it keeps them from competing in real market prices. The farmers tend to over produce crops in the BFS as they know that the government would buy in the excess amount and their profits will not go down. Due to that, the farmers have little incentive to produce cost effectively.
The Common Agricultural policy is actually a government failure. Firstly, it causes an inefficient allocation of resources in the market. Guaranteeing the farmers a higher price for agricultural goods will only discourage them from allocating their resources efficiently according to the market and to produce cost efficiently. It would also attract more entrants into the agricultural market or encourage farmers to expand their production. More lands would be cleared off to make way for agriculture purposes and this could have a huge impact on the environment. But if the government tightens the regulations on land ownership, this would not be a problem.
Moreover, the cost for maintaining this policy is tremendous and is a strain to the European Union’s budget. As mentioned in an article 'The EU common agricultural policy', it is said that the policy costs around £30bn a year, or half the EU's £60bn annual budget. The government would have to rent warehouses to store the excess commodities that are bought in. The government then would then incur a high storage cost for storing the large quantity of agricultural goods in warehouses.
The Common Agricultural Policy may seem as if it is doing more harm than good to the society. However, I think its intentions are good and it should be encouraged. It is important that the EU commission plan thoroughly and carry out the policy carefully, making sure that all sides benefit from it.
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