AAEC 4305: Agricultural and Public Policy

1. AAEC 4305: Agricultural and Public Policy Fall 2006 Dr. Don Ethridge

2. Course sections • Introduction • The policy process • U.S. commodity policy • Policy in a global setting • Natural resources policy • Food policy

3. Introduction (Chs. 1, 2) • Definitions and classifications • Forces affecting agricultural policy • Reasons to study policy • Policy goals • Role of economics

4. Policy—a guiding principle leading to a course of action (programs) that is pursued by a government • Economic policy—pursued in management of national economic affairs • Agricultural policy—sectoral economic, natural rescource, and social policy

5. Forces affecting agricultural policy • Inherent instability • Globalization • Technology • Food safety • Environmental concerns • Industry structure/industrialization • Politics/political system • Individual events

6. Why study policy? • Reasons vary • All countries interfere with markets • All countries are affected by their own policies and policies of other countries

7. Producer Support Estimate-annual monetary transfers to farmers from all policy measures as a % of all farm receipts. Indicator of extent to which a country supports agriculture

8. PSEs, 2004 • Australia 3 • Brazil 3 • Canada 16 • China 8 • E.U. 34 • Japan 56 • Mexico 17 • Turkey 27 • U.S. 4 Source: OECD

9. Policy problems • Price & income instability • Political instability • Poverty • Food safety • “Market failures”

10. Market Failure

11. The “Magic” of Markets • No coercion. Markets operate based on individual optimizing decisions. There is no authority that forces individuals to make specific production or consumption decisions. • As an “unmanaged” system, it is, in fact, the most efficient system of large-scale organization ever conceived. • No guilt in gain: individual optimizing behavior leads to collective optimal outcomes.

12. Efficiency • Markets tend to create economic efficiency. • Use A producers should be able to acquire the resources by outbidding use B and C producers. • So markets will tend to allocate resources to their highest valued use. • But what if prices do not accurately indicate consumer valuations of various goods and services?

13. Producer and Consumer Surplus in a Functioning Market S Pareto Optimal allocation – You can’t make anyone better off without making someone else worse off. P* D Q*

14. An Example of Government Intervention in a Market – Price floor Supply Domestic Price Floor A B C P* Consumers lose A, and B Demand Qd Q* Qs

15. The Change in Producer and Consumer Surplus Supply Domestic Price Floor A B C Producers gain A, B, and C P* Consumers lose A, and B Demand Qd Q* Qs

16. The Cost to Taxpayers SUPPLY Domestic Price Floor Ps A B C Government must pay Ps * (Qs-Qd) for surplus not taken by the market. Area B,C,D,E,F,G D P* H E G F DEMAND Qd Q* Qs

17. Cost to Taxpayers if Surplus Dumped is still greater than Area C S Domestic Price Floor Ps A B C If government can dump surplus it will recover I and J D P* H E G F Pw Price of Surplus dumped on World Market D I J Qd Q* Qs

18. Conditions required for markets to be Pareto optimal • Completely defined property rights • Competitive markets • Market prices are known by all producers and consumers • Transaction costs are zero

19. Market Failure • When markets work as intended, individual optimizing behavior leads to collective optimal outcomes. • Markets fail when individual optimizing behavior does not lead to collective optimal outcomes. • This will occur when prices do not accurately indicate consumer valuations

20. Two Broad Categories Of Justification of Government Market Intervention • Market Failure • For some reason markets fail to work • Economics has a lot to say about when and why • Redistributional • Policy makers want to redistribute wealth • Economics has relatively little to say

21. Causes of Market Failure • Common property (non-excludable) goods. • “Unfair” market power. • Asymmetric information. • Externalities.

22. Non-excludable goods • Inherently can’t be exclusively consumed or defined as a common good. • National defense • Ocean fishing grounds • Government Responses. • Public provision • Regulate use of the common good • Provide incentives to encourage cooperative use

23. Unfair Market Power • Monopoly, Monopsony, Cartels • Government responses • Trust busting (anti-trust law) • Regulation • Facilitate equalization of market power • Cooperatives • Take over natural monopolies • Public utilities • Roads

24. Asymmetric Information • Market fails because of uncertainty: • Uncertain about characteristics of other party’s product (used cars) or behavior (unmonitored workers slacking) or about future events (weather) • Government responses • Mandatory price reporting • Mandatory livestock price reporting • Collects and disseminates information • USDA market reporting • Market grading • Fills the missing market • Crop insurance

25. Externality • The effect of one decision maker on another that is outside the market — market prices do not reflect full costs or benefits. • pollution that results from some production process. • Government responses • Taxes • Subsidies • Regulations

26. Constraints on policy • Economic philosophy • Political philosophy • Government resources and costs • Conflicting policy goals

27. Agriculture/food sector policy goals • Market stability • Food security, safety, & health • Sustainability • International competitiveness

28. How economists contribute • Analyze policies and programs • Educate and provide advice