Posted at 11.02.2018
In the most commercial countries, the competitive markets are rarely clear of government intervention. Government authorities not only impose fees and give subsidies but also regulate the market in many ways. Governments control the equilibrium price and variety in competitive market to increase the aggregate financial welfare. (Pindyck and Rubinfeld 2009). Such as price roof can cause the scarcity which is the increased level of demand and variety supplied to land. Besides controlling the purchase price by imposing minimal price, government authorities can sets market price of products above the free-market level by buying outputs that are required to maintain immediate price of any good (Pindyck and Rubinfeld 2009). The use of high minimum price and lump-sum subsidies in agricultural market will be talked about and likened later.
Agricultural market in European countries has been greatly influenced by government intervention program, called the normal Agricultural Policy (Cover). This can be well proved exemplory case of showing success of administration intervention in the market for various agricultural market. In a variety of forms of intervention such as high minimum amount price settings, and lump-sum subsidies, lots of farmers in European countries have been assured using their agricultural products and their income. Agriculture protects major territories over the world and has been played out key role in determining out health balance and rural revitalization like economy activation. Europe is world greatest importers as well as major huge exporters of agricultural products. To safeguard this huge agricultural community, the Western Economic Community (ECC) including six Europe, Belgium, France, Germany, Italy, Netherlands, and the Luxembourg got introduced the normal Agricultural Insurance plan. Over past years, the assignments of CAP have been modified to encourage farmers not only produce better agricultural products but also make their countryside place better location to live, visit, and work. CAP, an agricultural assistance program, has prompted an enlargement of agriculture all over the Europe and lead them become biggest trader in agricultural market (http://www. blacksacademy. net/content/3347. html).
The Common Agricultural Policy has constantly evolved to complement with period changes in both agriculture and communal community all together. The CAP was made under the Treaty of Rome and operated in 1962. Farmers received subsidies and were guaranteed for his or her products with high prices from the Cover, and then farmers were encouraged to produce plants more. The Cover also provides the financial assistances to restrict the farm. However, their plan didn't always bring the best benefits to farmers as the expectations of citizens, consumer and farmers, so, it became unpopular late then. Listed below are the primary purposes of the CAP from Treaty of Rome, article 39. (http://webcache. googleusercontent. com/search?q=cache:EEJnO0zrWaMJ:www. civitas. org. uk/eufacts/FSPOL/AG3. htm+single+payment+scheme+lump+sume&cd=10&hl=ko&ct=clnk&source=www. google. com)
To provide food at affordable prices
To ensure option of food
To ensure fair living benchmarks for the agricultural community
To increase productivity
To stabilize marketplaces.
(From second research) Over a long time, CAP has been reformed, and first reform was performed in 1992 and additional reform was in 2000. Both two of reforms did not bring big dissimilarities of level of subsidies. EU finally decided to make significant reform that farmers aren't no longer subsidized, instead farmers receive the Single Farm Payment which is called lump-sum subsidies over the entire year 2007-13. So, farmers in EU are encouraged to produce matching to requirements. Now, farmers get paid not for how much they have got produced, but for their role as guardians of the countryside.
Unlike the primary purpose the Cover induces farmers to concern not just a quality of products demanded by the agricultural market, but also trends in agricultural development techniques such as renewable energy resources. The farmers now must play jobs of harmonizing their traditional skills with modern solutions to provide great valuable products with affordable price on the market. Farmers should also be concerned with safety and welfare of natural environment as well as cleanliness of crops. The CAP has played out many assignments in population by caring for the welfare of rural community, conserving the nature welfare, and making farmers sure about their price of products with minimum amount price ceiling. Today, the Cover continues to support the EU agricultural market segments by responding to the anticipations of both farmers and citizens and will keep reforming to market the agricultural market and development of society all together.
Many critics dispute about the expense of the agricultural assistance system, the CAP. The Organisation for Economic Co-operation and Development (OECD) says 39 billion pounds are backed to the Cover, and the money spent on the CAP is 34 billion pounds should go direct supports to farmers and snooze of money are put in to price support, general public purchasing products. The CAP's budget is accounted for 45. 4$ of EU's budge. As shown in Number 1, the budget of the CAP is accounted roughly 50 % of the EU's budget each year. At this time, the problem comes up to the surface that the Cover costs too much and benefits relatively very few people. In comparison to number of men and women who advantages from the Cover, it cost too much to support the farmers. Experts criticize that he subsidies directed at farmers still distort world markets, and impact the farmers in other producing countries because EU guarantees the prices of crops in Europe. However, supporters of the Cover argue that aiding the farmers is the only path for success of rural contemporary society where over fifty percent of EU people live. (From first research)
As mentioned above already, million founds of the Cover budget was spent on price support. The federal government guaranteed the very least price for farmers' crop. Some grains (loaf of bread, whole wheat, and corn), daily products, glucose etc are major commodity in agriculture market. The products count on floor price which promises the farmer's income. Figure 2 illustrates the high price minimum that administration can regulate. Within the picture the change in producer surplus will be A-C-D and Consumer surplus is -A-B (Pindyck and Rubinfeld 2009). In cases like this, manufacturers (farmers) may be worse off because while high least price encourages designer to supply more product, consumers demand less because of higher price of product than equilibrium price. The graph implies that high minimum price causes the companies worse off (Pindyck and Rubinfeld 2009).
At this point, whenever the costs falls below the floor price the idea of price support comes on the top because to make producer better off authorities buys up number Qq = Q2-Q1 to keep or increase a cost PS above the market-clearing price, shown in shape3 (Pindyck and Rubinfeld 2009). Because consumers have to purchase the merchandise at higher price PS, Rectangle A shows a loss of consumer surplus and then for other consumers who decide not to buy the goods, their lack of consumer surplus is given by rectangle B. Then total consumer surplus is -A-B (Pindyck and Rubinfeld 2009).
The cost of covering the minus maker surplus can be reduced by dumping some of its buys like selling the merchandise (crops) overseas in cheap price, then it can cover up some of budget. The cost government hides is the speckled rectangle, PS(Q2-Q1). As an insurance plan in integrated the manufacturers gain because they can sell the quantity Q2 rather than Q1. Company surplus can be indicated like a + B + D. Even though government can keep the purchase price high and farmers are assured with the income, the group that federal government tries to protect is merely the domestic producers. The federal government concerns with only its domestic manufacturers. They hurt both domestic manufacturers who sell the merchandise in international market and manufacturers reselling similar products in foreign countries. The full total change in welfare can found with the addition of CS and PS, and subtracting the expense of government expressed as D - (Q2 - Q1) PS (Pindyck and Rubinfeld 2009).
For example, matching to European Fee Agriculture and Rural Development, the Cover offered subsidies to farmers and assured high minimum charges for their products which offered them incentive to create more. Financial assistance was presented with to farmers for the purpose of restructuring of farming. Farmers could actually adapt the economic and interpersonal condition all together by subsidizing plantation investment in plantation development and management skills. The Cover was very successful until 1980s, however, federal government suddenly had to deal with everlasting amount of surplus they had to cover up, many of surplus were also stored and even disposed within the European countries. Because of ruinous amount of budgetary coast and distorting the overseas countries, it did not always bring best benefits, and then insurance policy of high minimum amount price quickly received unpopular.
Lump total subsidy is a form of government aid in which a fixed amount of cash is given to producers whatever the amount of goods they produce (Costa, Osborne, Zhang, Boulange, and Jomini 2009). For the farmers, it generally does not really subject how much they produce, every single farmers get same fixed amount of cash P1 even though they create different amount of products, illustrated amount 4. P1 (market clearing price) also symbolizes both average income and marginal revenue. By providing abrupt amount of lump-sum subsidies to farmers, farmers can reduce fixed cost quite simply farmers can reduce total cost as well as average total cost, ATC. As well as can raise the profits distributed by rectangle A+B rather than just A without subsidies. In the graph, C1 is the cost at ATC1 before farmers are given subsidies, and Cost of producing products is reduced from C1 to C2 at the idea ATC2 produce (Costa, Osborne, Zhang, Boulange, and Jomini 2009). Since authorities offered lump-sum subsidies to farmers, unlike high minimum amount price (floor price) system, authorities doesn't have to concern and worry about everlasting amount of surplus they have to purchase to hide farmer's income. It is now farmer's job to make their money with chance of making more income since they receives a commission sudden sum of money. And then the federal government would not have to matter about purchasing surplus that makers make. Consumers are not influenced by lump sum subsidies because in a correctly competitive market, suppliers will not charge more than the market- clearing price.
As mentioned previously, the use of high least price by the CAP became unpopular at an abrupt moment. According to European Commission payment Agriculture and Rural Development the Cover reformed system and introduced lump-sum subsidies. This new system brought advertising of the competitiveness of European agricultural market and motivated many rural initiatives. With abrupt amount of subsidies given to farmers, farmers could reconstruct farms and improve management techniques. It gives 100 % of flexibility to farmers to create how much they need. Additionally, it may cause the high cost of entrance fee in to the market since a few of the subsidies directly go to be capitalized into land and it make the land more expensive for new entrants produce (Costa, Osborne, Zhang, Boulange, and Jomini 2009).
It seems it is better of the utilization of lump-sum subsidies to farmers than the utilization of high minimum prices. The high minimum amount prices sometimes go out of control whenever there are long term amount of surplus that federal government must pay to hide producer's income. Unlike the high least prices, lump-sum subsidies gives fixed sum of money to providers and leave the duty to manufacturers how much they'll produce(Costa, Osborne, Zhang, Boulange, and Jomini 2009). It is now better for famers to leave in agricultural sector than going out of rural because even though they loss the profits the subsidies directed at farmers hide losing from farming. As illustrated above, European union has only unexpected amount of budget (BBC information 2008), if the budgetary cost raises because of the floor price, it implies that this systems is not effective looked after leads to lack of welfare. As a result, lump-sum subsidies to farmers are more desirable means of tackling the issues of the free agricultural market.
Government intervention including the CAP in europe is an excellent example of pushing an growth of agriculture sector in the European countries. Its support for the agricultural sector has been reducing world price for agricultural products. Its work moves other areas of economies to other sector of agricultural sector which come out with higher dividends. Government involvement in the agricultural sector can result higher level of welfare in rural neighborhoods. However, some kinds of intervention business lead to loss of great things about farmers. Many have been tried out by authorities such as high minimum prices, market support, lump-sum subsidies to farmers etc. Promoting the agricultural market and development of contemporary society all together by motivating farmers must benefits farmers and culture. For future years the job government authorities want to do is to hide the weaknesses in the present to make remarkable improvements in production level, boost the income of farmers, and reduce number of people giving rural areas, placing emphasis on mother nature and pet welfare, at the same time producing high features of agricultural products.