2.4 Rationale for Intervention

• Debate: proper role of GovernmentCochrane – YES – good societyTweeten – 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 governmentObjective: Retain power - votesInterventions: taxes, subsidiesInterest 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 GoodsWhere should government get involved?

• Institutions help define the nature of goods and the rationale for intervention

Who should provide which goods?

• Characteristicsa) form, location, timeb) exclusivity - excludability

defined property rightsenforcement

c) rivalry - divisibilityd) 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

PRIVATECOMMONPOOL

PUBLIC

Market Civil SocietyCollectives

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 informationRS – source of information on social needs,

costs to provide goods

Potential efficiency gain

e.g. 2008 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)

PSE PESTs (% of PSE)

PERTs (% of PSE)

Wheat 33 79.2 20.8

Milk 71.2 94 6

Eggs 26.6 75.8 24.2

Beef 18 26.7 73.3

Pork 16.6 16.3 83.7

- Data from late 1980’s

1986-88 2004-06 2006 Producer Support ($B) 8.05 7.96 8.53 PSE (%) 36 22 23 Consumer Support ($B) - 3.79 - 3.63 - 4.23 Total Support ($B) 10.01 10.82 11.46 Transfers from consumers 4.14 3.63 4.23 Transfers from taxpayers 5.88 7.19 7.23 Total Support/GDP (%) 1.80 0.79 0.80

1986-88 2004-06 2006 Producer Support ($B) 36.8 38.1 29.3 PSE (%) 22 14 11 Consumer Support ($B) -3.0 19.6 25.9 Total Support ($B) 64.1 101.5 96.9 Transfers from consumers 14.8 10.2 5.7 Transfers from taxpayers 50.9 92.8 92 Total Support/GDP (%) 1.35 .82 .73

Other Countries PSE’s (2002-06) New Zealand – 3% Australia – 5% EU – 32% Japan – 55% Iceland – 75% OECD, Paris: Agricultural Policies in OECD Countries: Monitoring and Evaluation (2007)

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 organizationsCanadian 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