2.4 Rationale for Intervention Debate: proper role of Government Cochrane – YES – good society Tweeten – NO distortion Should government be involved? Why is government involved? Theory of public choice J. Buchanan & G. Tulloch (The Calculus of Consent – 1962) Premise: self-interest of government Objective: Retain power - votes Interventions: taxes, subsidies Interest groups:influence – rent seeking Political market – supply and demand Choices made: economically inefficient. Politically efficient

Why does policy exist? 1) Market failure –externalities –benefits/costs not reflected in prices –inefficient allocation of resources - sub-optimal –Intervention: market equilibrium closer to social optimum Rational basis for intervention? –Ronald Coase (1930’s) property rights is the problem Create rights & the market will work 2) Robin Boadway (1997) – 3 reasons Efficiency – externality argument Stabilization – price/income Redistribution – social goals Distribution and rent-seeking –Redistributive government, prey to rent-seeking –Rent-seeking – active redistribution –Incentive to organize and lobby government –e.g. SM-5, CPR

Institutions and Goods Where should government get involved? Institutions help define the nature of goods and the rationale for intervention Who should provide which goods? Characteristics a) form, location, time b) exclusivity - excludability defined property rights enforcement c) rivalry - divisibility d) voice 3 types of goods private public common access (pool) Government intervention –change the nature of a good – lobby pressure E.g. plant genetics – Bill C-20 Plant Breeders’ Rights Act (1990) Bill C-91 (patent protection) (1993) Drug Patent Act

Voice Exclusive Rival PRIVATE COMMON POOL PUBLIC Market Civil Society Collectives Government Picciotto's (1995) Framework

Rent-seeking – Always bad? a)Predominant view – RS => misallocation No distortions – competitive markets Waste of resources b)Benefits to rent seeking Effective intervention requires information RS – source of information on social needs, costs to provide goods Potential efficiency gain e.g Organic Farming Regulation (Federal)

Categories of rent seeking (Rausser) Political economic-seeking transfers (PESTs) Predatory behaviour Purely an economic transfer rent seeking behaviour Political economic-resource transaction (PERTs) Correct market distortions, improves efficiency Information – preferences, costs Government: –Balance interests of various groups (PERTS/PESTS)

Canadian PERTS/PESTS (OECD, 2000) PSEPESTs (% of PSE) PERTs (% of PSE) Wheat Milk Eggs Beef Pork Data from late 1980’s

Canada: Support to Agriculture ($CA Billions) United States: Support to Agriculture ($US Billions)

Rent Seeking – conflicts & coalitions Multiple rent-seeking groups –Rent-seeking conflicts –farmers vs. consumers vs processors –Farmers vs. Environmentalists Input subsidies (diesel) - reduced GHG emissions Coalitions & log rolling –Multiple groups – common objective Commodity groups Farm organizations Input manufacturers Grain handlers Consumers Common goal: Increased farm output

Lobby Groups Farm organizations Canadian Federation of Agr. (CFA) umbrella group National farmers Union (NFU) Individual membership Commodity groups –Western Canadian Wheat Growers Assoc –Canadian Cattlemen’s Association –Dairy Farmers of Canada Provincial groups UPA Dairy farmers of Ontario Sask. Organic Directorate Private companies Government’s problem? Who speaks for Canada? Free trade vs protection (Potash Corp. CRTC) Consumer protection vs freedom to farm