Milk Crisis in Europe

Based on the article by Martin Kloubek, titled "The milk crisis reveals the need for production quotas" on glopolis.org dated 5th October 2009, there was a milk crisis in the Czech Republic. European farmers were going through a tough time, as the prices of milk could barely cover their marginal costs. The prices of milk were once very high before the crisis happened. The change in situation was due the reason that the EU planned to let the market forces control the market naturally by the release of price floors, the raise of production quotas and overall, a ban on intervention mechanisms.

Price floors are imposed by the government to illegalize the market to charge a price below the specified price. A price floor below the equilibrium price will not have any effect on the market as the market forces are not in conflict. So, a price floor is supposedly set above the equilibrium price to cause a constraint in the market and prevent the price from regulating the quantities demanded and supplied.

 

If a price floor is implied to a good or service above the equilibrium price, a surplus would occur because the quantity supplied for the goods or services would exceed the quantity demanded for the goods or services.

Let us say that if a price floor were to be still applied onto the price of the milk, a surplus of milk would occur. The increase in price would increase the quantity supplied for milk, but in the same time, the increase in price would decrease the quantity demanded for milk, therefore, having the quantity supplied exceeding the quantity demanded for the milk would result in the surplus of milk. There may be still a surplus from the price floor before this, and in European countries, the government would buy excess supply from the farmers [assuming milk is related to the problems with butter or milk is included in the buy-over, since the main idea is to help the agricultural community] and by the disbanding of the price floor, prices dropped to the equilibrium and with the existing surplus, the situation got worse. In my opinion, the price floor may have helped the farmers a little but the cost of the price floor may be detrimental to the nation’s economy as the government is just covering the damage for a temporary moment and not solving it as the problem is just merely diverted to the government. A different approach instead of a price floor should have been implemented.

As for the production quota, a production quota is a cap made to limit the production of goods in a specific amount of time. For a production quota to be effective, it has to be set below the
equilibrium quantity as a price below the equilibrium quantity would create a conflict between the forces of demand and supply.

When a production quota is applied onto a good or service, a decrease in supply would occur as all production and supplies for the particular goods or services has been set to a limited about and any production or supply of that goods or services above the set amount would be illegal. This makes the particular goods or services perfectly inelastic. A rise in price would also occur since quantity supplied has decreased, price will increase. Marginal costs of the goods and services decreases as the quantity supplied decreases as well. With the production quota implemented, producers may also tend to cheat or overproduce as well because with the quota in place, marginal costs of produces decreases and the ability to produce more products increases.

 

 

When the production quota for milk has been increased, the price of milk will drop and quantity supplied for the milk will rise.

Since as stated in the article, the cause of the milk crisis is the unbelievably low purchase price of the milk, the release of the price ceiling and production could be possibly related as the release price ceilings and the increase of the production quota would both decrease the price of the milk and with the excess supply of milk, prices may not recover that soon. The release of the production quota may have also increased the marginal costs of the farmers and with the decrease of price in milk and the increased marginal costs, this may possibly be the reason why the farmers can barely cover off their marginal costs with the low purchase price of milk.

The country now has probably a high surplus of milk especially with possible surplus contributions from the price ceiling system and also the production quota system. With the production quota implemented, farmers may have possibly overproduced the milk since their the quota still decreases their marginal costs and in the same time increases the price of the milk, farmers can afford to produce more milk and may have possibly cheated in supplying more than the quota since it would be difficult to detect the violation. The government has planned to implement export subsidies to dump all these surplus of milk. The subsidy would decrease the sale of milk in the domestic market and motivate the producers to sell out to foreign markets.

In my opinion, the eventual release of the market intervention systems would be tough on the farmers in the initial stage but with the strategies of allowing the invisible hand to slowly push the market to its natural equilibrium state would be a good choice. In the long term, the market will stabilize. To re-implement the production quota would still have its loopholes and the tendency of illegal production with its tempting low marginal costs with the temporary high price as farmers may still assume that the government will still help them buy off the excess production. Even if the farmers stop producing, without the quota, the quantity supply should decrease eventually as well with the effect of the invisible hand. I think the government is making a reasonable but tough choice.

( Author: Student ID - 0312718 )