European Agricultural Policy free essay sample

European Common Agricultural Policy (CAP) isthe set of regulations and practices endorsed by the EU to bestow a common and integrated policy on agriculture which proved a capacity to accommodate and alter in the face of new challenges. Its primary aims are: increasing agricultural productivity with the help of technological progression, stabilizing markets for agricultural products, ensuring reasonable standard of living for farmers, making goods cheaper and more affordable for consumers and last but not least supplying food on sufficient scale. There are several methods that CAP used to realizeits purposes, for example price floor. Price flooris minimum price appointed ‘by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance’. As we see the graph below, price floor is a problem if it is set above the equilibrium price but not an issue if it is below the equilibrium price. . When the government installs price floor is above the equilibrium price supply will exceed demand. How? When the price floor is above the equilibrium price consumers do not intend to purchase as much quantity. The consumers will buy ‘the quantity where the quantity demanded is equal to the price floor, or where the demand curve intersects the price floor line’. Besides, the higher prices will spur producers to supply more than the demanded quantity. The suppliers will supply where the price floor equivalent with the suppliers’ marginal cost. Hence, it will induce surplus. The most powerful example of price floor effect was a ‘butter mountain’ and ‘wine lake’. There are numerous ways that governments use to avoid and mitigate enormous surpluses like the ‘butter mountain’ phenomenon. Firstly, they might buy the surplus up (from the taxes) and export it, but it makes the taxpayers worse off. Secondly, the government might set production quotas (lobbying for rights and even bribery)to motivate the reduction of production (in some cases literally pay farmers no to produce). Overall, a price floor has more costs than benefits for the government and society. Although, it helps farmers and a relatively small group of people, it hurts the major part of the society at the same time. It causes a deadweight welfare loss. It happens when the government accept a regulation that removes the market away from equilibrium, advantageous selling and purchasing that would have occurred can no longer befall. So, therefore CAP had to find another way to protect the farmers and to not cause problems in other parts of the society. To overcome the problem associated with the price floor the government adopted a policy to introduce a subsidy. The subsidy ‘a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction’. This kind of government intervention is usually given to dislodge some type of burden and is usually regarded to serve the interests of the public. For instance in case of farming, the government might provide cash subsidies to farmers thus they can vend at a lower price that is what helps farming to survive in an extremely competitive market. As we see the graph above, the subsidy causes a right-ward shift of the supply curve. It means that farmers are encouraged to produce more food at lower market prices. The quantity demanded will increase because the price is lower which stimulates consumers to purchase more. The demand curve stays the same because the only change was to quantity demanded. The implemented direct agricultural subsidy by CAP has various effects on different parts of the market and society. The government will have financial costs which are what they pay for farmers to help them to be more competitive on the market. The farmers’ gain equals to the government’s financial cost. Thus, farmers will be better-off because of the increased income. The citizens, who are consumers and taxpayers at the same time, will have benefits and costs as well. Although, they will benefit fromcheaper products (consumer surplus) they will pay the government’s financial cost in the form of taxes. Finally, other international markets on broader scale will benefit if the prices of products become more expensive or they will lose if the price is less in the market. As the essay title given, we need to consider two methods of agricultural subsidy. In case of England, farmers receive cash subsidy for each hectare without restriction in terms of production. The problem with this method is that farmers do not have incentive to produce in the most efficient way because they get their money either way. Therefore, the supplied quantity will not achieve the expectations. We can clearly see (below) how farmers cut back their production and does not affect the amount of cash subsidy that they receive from the government. This sort of subsidy is an appropriate example to illustrate the misallocation of government resources. In the second case (Scotland), producers receive cash subsidy after production which result more effort. The farmers will get subsidy in proportion with production. Consequently, the subsidy will achieve the required result and increase the supply and quantity demanded simultaneously. However, subsidy raises the issue of equity (transfer of resources, government takes money from one part of the society (consumers) and give to another one (farmers)) we should consider the longer term effects and see that consumers will take advantage of it. The sufficient supply of food (especially in case of the example of Scotland) will protect citizens from dramatic tax burdens and prevent food shortage in the future. Personally I think, scrutinizing the consequences of two different approaches, price floor cannot help the economy effectively overall. On the other hand, subsidy is a more efficient way to protect the agricultural community without hurting other parts of the society. In my opinion we should adopt multi-dimensional approach. References: Gregory, Makiw and Taylor, M. P. 2011: Economics 2nd edition: 118-135. Paul,Krugman and Wells, Robin. 2009:Economics 2nd edition.