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Should Governments Subsidise Food Prices? To see more of our products visit our website at Neil Folland.

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Presentation on theme: "Should Governments Subsidise Food Prices? To see more of our products visit our website at Neil Folland."— Presentation transcript:

1 Should Governments Subsidise Food Prices? To see more of our products visit our website at Neil Folland

2 International agricultural markets directly influence the welfare of more than six billion people. The efficiency of agricultural markets, volumes of trade flows and the volatility of prices affect a number of interlinked issues. These are… Food security – at global, national and household levels. Real household income levels – due to share of household spending on food. Macroeconomic performance and price stability.

3 Governments have intervened to keep food prices stable for hundreds of years. This was based on price stability and efficiency. Stability was provided through guaranteed prices and assured markets. UK Agricultural Act 1947 brought stability to UK market.

4 After the UK joined the EU price stabilisation was determined by the Common Agricultural Policy which supported farmers through guaranteed prices. By 2003 CAP reform decoupled farm support from production. Now offers annual payment for basic agricultural and environmental maintenance of farmed land, with no requirement to produce. CAP is still the largest item in the EU budget accounting for about 45% of total expenditure.

5 In 2008 EU agreed further reforms to shift subsidies away from production to take place from 2009-2013. Subsidies are considered harmful as they distort world markets and harm farmers in developing countries. Subsidies will now be transferred to conservation. The loss of arable set-aside subsidies is controversial as conservationists argue that this policy has helped wildlife.

6 The countryside may become less attractive But the EU will become more competitive Money spent on subsidies can now go to technological and scientific research. Europe will probably end up importing more products that it cannot produce efficiently.

7 As agriculture becomes more responsive to market forces there will be structural changes. There will be an exodus of farmers from the industry. Reform appears to be encouraging diversification rather than stimulating rapid agricultural restructuring. There is increasing polarisation between large and small farmers.

8 Normally a food subsidy will reduce the market price of the subsidised good. This will increase the real income of consumers. It will also provide food security by keeping supply at a high level

9 The subsidy shifts the supply curve out to the right. Market price falls from P to P1 and quantity increases from Q to Q1. This results in an increase in consumer surplus of PVWP1. Producer surplus increases as producers produce more and receive a higher price. (P1 + the subsidy RW). However, someone has to pay for the subsidy.

10 The more that demand is inelastic the more of the subsidy producers will pass on to consumers in lower prices. Market distortion will depend on the amount of the subsidy and the length of time it is in place. We must also consider the opportunity cost of government spending on subsidies compared to alternatives foregone. Long-term commitment to a subsidy might lead to production inefficiencies.

11 Subsidies may slow down industrial restructuring. As household incomes rise a declining share of total income is spent on food. Increasing economic growth and productivity in the non-farm sector will increase non-farm wages and draw labour away from agriculture. This in turn will lead to rises in agricultural wages. This will encourage the substitution of capital for labour with investment in machinery. Agricultural productivity will rise and optimum farm size will change.

12 There is the possibility of government failure. The cost of processing a claim under the EU’s Single Payment Scheme often costs more to administer than the value of the claim itself. There have also been “unforeseen additional costs” and overpayments.

13 Some might argue that this would apply to foods which are considered ‘essential’ or ‘healthy’. For example palm oil is now valued as an alternative to ‘trans fats’ which have been banned in certain places. Should the government decide what is good for us to eat? Financial support to back such a decision will distort price signals.

14 They hurt the urban poor where food is the most expensive item in their budget. But benefit agricultural communities by increasing rewards and raising growth and employment. Higher food prices might make it possible to reduce subsidies with hurting incomes. If developed countries cut subsidies and lower other trade barriers this will promote world trade to the advantage of many of the world’s poor.

15 The aim of intervention through farm price subsidy is often to provide price stability and food security but subsidies involve an opportunity cost. Subsidies have both micro and macro impacts and we must recognize economic efficiency as well as equity issues. Dismantling or reforming established farm support schemes can have far reaching consequences both beneficial and adverse. Economic analysis can determine welfare losses and gains from the introduction or removal of subsidies. Subsidies can result in both government failure and unintended consequences.

16 To what extent do food subsidies contribute to a misallocation of resources? What arguments could a government employ to justify its use of food price subsidy? How would a reduction in agricultural subsidies affect the structure of the industry?

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