Supply and Demand and Government Intervention in the Market

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