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I ² Increase Agricultural Efficiency/Productivity II ² Ensure Fair Standards of Living for Agricultural Workers. y III ² Stabilise Agricultural Markets y IV ² Ensure Supply Availability y V ² Ensure reasonable prices for Consumers.
y y y
I ² EC Preference (i.e., a CET) II ² A single Product Market III ² Financial Solidarity.
Conflicts between Objectives + principles:
Implication of regional specialisation from Objective I and principle II. However, no evidence of this occurring in times of exchange rate volatility.
Price D S S· S··
Why was it needed? Demand side:
y y y
Low Income Elasticity of Demand for food (Engel·s Law) Thus supplies depended on rise on population rather than income. Low PeD at higher income levels. Low PeS in the short-run due to lags Low labour mobility (farming as a way of life) Low lab. Mobility lead to excess labour supply ² to be remedied by fast urban growth (Lewis Model). Tech. Progress disproportionately fast, leading to structural excess of supply. Evident environmental stochastic problems. Farmers may respond to falling prices by increasing supply ² further depressing prices.
y y y
The diagram shows the problem: Low Price elasticities exaggerate the effect of increasing supply due to tech. Progress, and Demand will shift much slower the supply due to population growing at a slower pace than technology.
Q Q· Q··
CAP ² TYPES OF INSTRUMENT (FREE TRADE USED AS THE BENCHMARK)
Variable Levy with Price Support No Import Competition
Target Price ² upper limit of prices. y Intervention Price ² lower limit of prices. y Threshold Price ² Target Price + transport costs.
Price DEU PT Pi c a b e PW g f Q1 Q2 d
The EU will buy the excess supply to ensure Pi is achieved. Therefore
y y y y y y
0 ² Q1 is purchased by domestic consumers. Q1 ² Q2 is purchased by the EU at Pi. Consumers LOSE (a + b + e). Domestic producers GAIN (a + b +c) Community LOSES (pays) (b + c+d+e) NET LOSS OF (b + d + 2e)
CAP ² TYPES OF INSTRUMENT
With Import Competition:
Same as standard Tariff diagram w/ DWL triangles.
Deficiency Payment Scheme (DPS):
Similar to standard Tariff Diagram, except it makes up the difference between the market price and a price agreed ex-ante. Thus, it doesn·t alter the supply schedule. Hence, whilst the deadweight welfare loss under the former would be the yellow and red triangle, under the latter only 0 ² Q1 units are sold and thus the EU only has to reimburse up to Q1. Therefore, DWL from DPS = red triangle.
The DPS is VISIBLE in it·s redistribution from consumers to producers, whilst the VLS is invisible, and is therefore more politically tractable. In addition, only a narrow band of goods it can be used for as farmers are both producers and consumers of goods.
CAP ² TYPES OF INSTRUMENT
Similar to the DPS ² except it sets an ex-ante limit on the quantity ² so it would agree on Q1.
Direct Income Payment (DIP):
Optimal vector for redistribution ² doesn·t work through the market like taxes and subsidies, so there are no market-distorting effects and price distortions. y Deficiency Payments per
Units of Land (BAD) Animal Negative income tax for farmers
CAP: TYPES OF INSTRUMENT
In Sum (Pre ² 1992 Mac Sherry reforms):
The CAP can largely be characterised by the VLS with price supports (about 70%). y This is very costly in terms of welfare, provides perverse incentives (encourages structural excess of supply and encourages continual shifting of Supply outward due to guaranteed intervention price), and lowers World price due to dumping. y Being an exporter is also bad for the terms of trade. y DIP are good but when tied to output + resources lead to gains for the big farmers (that do not need the support) ² about 80% of the transfers go to large producers, who, cumulatively, are only 20% of the sector.
CAP ² SUCCESS?
Has the CAP been a Success? Has it met it·s 5 Objectives?
1 ² Increase Agri. Efficiency (productivity)
Has increased, but more about tech. Progress and capital investment than regional specialisation, so the role of the CAP is unclear. Agri. Workers· income has actually declined relative to other industries. Yet net income is higher than average and can be explained by Agri. workers having multiple income streams ² about 25% of total income. It has worked in the short-term due to heavy price controls. But due to rigidity of system, the longer term is marred by structural excess supply. It has lead to self-sufficiency with many self-sufficiency ratios over 100%; but it is unclear whether this objective is as pertinent as it was at the conception of the CAP. Difficult to gauge. Whilst EU prices are higher than World Prices: Dumping has lowered World Price. There has been declining consumer prices. Conclusion is that it·s probably higher than it needs to be.
2 ² Fair income for Agri. Workers
3 ² Market Stabilisation
4 ² Security of Supply
5 ² Reasonable consumer prices
CAP ² SUCCESS?
Additional points: Costs to taxpayers/consumers has been high and redistribution sub-optimal. CAP DOMINATES the EU budget, making it economically and politically unsustainable as the funds are being directed from other causes. CAP has also lead to trade wars ² ¶chicken wars· with the USA. The agricultural market has been swamped by TRADE DIVERSION in terms of trade flows (Thorbecke et al.), in contrast to the rest of the EU which has seen high levels of Trade creation. Admittedly it HAS LEAD TO A SINGLE INTERNAL MARKET.
CAP - REFORM
Therefore, the CAP needs reform in the following areas:
Welfare Costs y Trade Conflicts y Budgetary Pressures y Positive regulatory Failures
Inefficient Market Support Sub Optimal Redistribution No steady labour exit Complex administration CAP inappropriate tool to consult the wider rural problems Adverse effects on the environment (set-aside). Supply surplus ² still high.
CAP ² REFORM + PROSPECTS
1992 Reforms (Mac Sherry):
Focuses on PRICE SUPPORT INCOME SUPORT. y Lowered intervention price for cereals (significant proportion of the industry) by 1/3 - although the threshold price is still high to prevent imports, dumping is less prevalent. y SET ² ASIDE: Compensation for leaving areas of production fallow. Acts as a form of DIP, moves burden from EU Consumers EU Taxpayers and doesn·t affect international trade.
However, leads to over-intensive production on remaining areas which is environmentally risky.
Although positive regulatory failures still remain (and are increasing in severity), steps are being taken in the right direction. y DIP could be devolved to individual member states, which would lower barriers to entry.