AGRICULTURAL PRICES AND MARKETS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
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Author: Imre Fertő Supervised by Imre Fertő
June 2011
Week 13
Government interventions in agriculture Literature
– Tomek, W. G. and Robinson, K. (2003): Agricultural Product Prices. Cornell University Press, Chapter 14
– Latruffe, L and Le Mouël, C (2009): Capitalisation of government support in agricultural land prices: What do we know? Journal of Economic Surveys, 23(4), 659–691.
Outline
• The framework of agricultural policy analysis
• The basic forms of price regulations – Price supports
– Deficiency payments – Minimum price
3 – Maximum price
– Price discrimination
• The costs of agricultural policy: The example of the CAP
• Numerical examples
The framework of agricultural policy analysis
• Definition of the market
• To identify the shifts of D and S
• To identify the changes in price and quantity
• To estimate the welfare effects of policy, including wealth and income
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Price support
5
Deficiency payments
6
The impact of price support on factor markets
LAND CAPITAL LABOUR
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Marketing margin
Px
Pb
Pa
S(a) S(b)
D(x)
D
Pa+S
a: agriculture, b: marketing, x: final product
∆Pa=∆Px-∆Pb ⇒∆Pa=∆Px, ha ∆Pb=0 D=D(x)-S(b)
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MINIMUM price – MAXIMUM price
Price discrimination
• Background idea: to charge a higher price on a market with relatively inelastic demand in order to raise average revenue
• Revenue ”pooling”
• Example
– USA and Californian milk market
– Canadian and Australian wheat market P
Q Qe
Qt
Pmin
Pe
Pmax
a
c
b d
1. PS=a-d
CS=-a-b
DW=-b-d 2. PS=-c-d
CS=c-b
DW=-b-d
9 – Processor use a homogeneous commodity milk to make different products – Fluid milk is price inelastic
– Manufacturing milk is price elastic
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Milk market no regulation
• Pm: manufactured products
• Pf: fluid milk
• Revenue:PmXQso
Milk market with classified pricing and pooling
• Pf>Pm
• CS=-b-c-d-g
• PS=c+d+e
• NW=e-b-g
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The distribution of costs of the CAP
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Numerical example 1
D(q)=16-P S(q)=P
1. Perfect competition 2. Price support P=10 3. Deficiency payment P=10
4. Minimum price
P=10
5. Maximum price
P=6
Numerical example 1 Price support
1. Perfect competition
D=S 16-P=P P=8,
Q=8
2. Price support
P=10 , D(q)=6, S(q)=10 PS=((10+8)/2)*2=18 CS =-((6+8)/2)*2=-14 T=-(10-6)*10=-40 DW=-36
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Numerical example 1 Deficiency payment
Numerical example 1 Minimum price
3. Deficiency payment Pt=10, Pf=6, Q=10 PS=((10+8)/2)*2=18 CS =((10+8)/2)*2=18 T=-(10-6)*10=-40 DW=-4
4. Minimum price Pt=10, Pf=10, Q=6
PS=((10-8)*6)-((8-6)*(8-6)/2)=10 CS =-((6+8)/2)*2=-14
T=0 DW=-4
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Numerical example 1 Maximum price
Numerical example 1 (cont.)
5. Maximum price Pt=6, Pf=6, Q=6 PS=-((8+6)*2)/2)=-14 CS =((8-6)*6)-((10-8)*(8- 6)/2)=10
T=0 DW=-4
DWá>DWv
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Numerical example 2
Numerical example 2 (cont.)
Dt(q)=16-P Df(q)=20-P S(q)=P
1. Perfect competition 2. Price support P=10
1. Perfect competition Pt=8, Pf=12
2. Price support Pt=10, Pf=14
CSt =-((6+8)/2)*2=-14 CSf =-((6+8)/2)*2=-14
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Conclusions
• The increase of supply implies to creation of surplus
• The increase of burden of taxpayers
• Introduction new programmes
• Traditional solution:
– storage
– Selling on secondary markets – export
• Efficiency issues
• Equity issues
– 80-20 per cent
– negative impact on poor consumers – Capitalization into land rent
– Entry barriers for new farmers
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ELTE Faculty of Social Sciences, Department of Economics
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