About ten years ago, European Common Agricultural Policy (CAP) underwent a major change. Rather than setting a price floor on agricultural products, now CAP directly subsidises farmers. Subsidies may be a flat rate payment for maintaining land in cultivatable conditions (currently around £250 per hectare in England), or may depend on the land’s crop in a given past year, which is taken as reference point (as in Scotland). Discuss the effects of such a policy move.
European Common Agricultural Policy (CAP) isthe set of regulations and practices endorsed by the EU to bestow a common and integrated policy on agriculture which proved a capacity to accommodate and alter in the face of new challenges. Its primary aims are: increasing agricultural productivity with the help of technological progression, stabilizing markets for agricultural products, ensuring reasonable standard of living for farmers, making goods cheaper and more affordable for consumers and last but not least supplying food on sufficient scale. There are several methods that CAP used to realizeits purposes, for example price floor. Price flooris minimum price appointed ‘by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance’. As we see the graph below, price floor is a problem if it is set above the equilibrium price but not an issue if it is below the equilibrium price. .
When the government installs price floor is above the equilibrium price supply will exceed demand. How? When the price floor is above the equilibrium price consumers do not intend to purchase as much quantity. The consumers will buy ‘the quantity where the quantity demanded is equal to the price floor, or where the demand curve intersects the price floor line’. Besides, the higher prices will spur producers to supply more than the demanded quantity. The suppliers will supply where the price floor...
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