The protection of agriculture in the EU at what cost?

As an Australian who has seen our farmers locked out of the European markets through the Common Agricultural Policy it is difficult to understand why Europe continues with protection of this industry. The latest reform includes handing out €435bn of taxpayers' money over the next 10 years. This is during a time when many other Europeans can not find work. The CAP is the EU's single largest expense, making up nearly half of the EU budget (38.5% now, but down from 72% in 1985).

Whilst the protection for farmers is what the EU desires, it neglects the impact this will have on every other industry.


The Guardian Report

The problem of argricultural markets

I have never met a poor farmer, but I have never met one that didn't complain either. But they do have their cross to bear.

The problem of agricultural markets is that natural events cause good and bad years with no predictability and so farmers incomes are literally all over the place. Ironically the 'good years' for crop yields are the bad years for income.

Deps won't know the term 'inelastic' yet, but it means that demand does not vary much with price. In rich economies everyone has enough income to eat and when food prices fall they don't each much more. Equally when food prices rise people have to buy food and so demand does not go down much either. So demand for food is 'inelastic'.

The result is that when there is a bumper crop farmers have to accept very much lower prices as supply expands. The quantity consumed goes up by less than the price falls and as a result consumers expenditure (farmers incomes) is less. In the diagram above the expenditure at price P2 and quantity Q2 is more than P1 Q1.

This is the situation Australian orange growers find themselves in. The rain and the sun arrived at exactly the right times, and so everyone has a good crop. There is no point letting the oranges rot on the tree and so all the farmers sell, raising supply in the market and lowering the price. The result, in this case, is a price lower than the costs of production.

This is one reason why so many countries intervene in agricultural markets. (Note this comes up in IB all the time.)

I suspect that the fools in IT continue to block the pictures, but I can't find a link to a picture that will show what I need you to see. So use your phone or ask Mr. Camburn to use his computer.

The Age explains the plight of the orange farmers here

The price of life?

Every year I look for a story that illustrates opportunity cost. This year I have recycled one from last summer. It is a classic one on how to best use the NHS's limited resources and comes from a decision of NICE (NICE decides which treatments should be available on the NHS).

There are many such tough decisions and this time it is a drug that helps those with late stage bowel cancer. This decision is to deny a drug to patients that will extend their life by six weeks to a few months. It costs £21,000 per patient.

The opportunity cost of allowing the drug for general use would be the treatments that could be funded instead. The article suggests 6500 patients could benefit a year. Thats £136.5 million a year available to patients who might live a lot longer.

This is not a pleasant decision for anyone to make. But it does bring home the real cost of a decision on resource use.

The BBC story is here