To maintain price the government intervenes and buys up the excess supply of 20 units at £3 each, and stores the unsold produce. Intervention costs £3 x 20 units plus the cost of storage. This theory is behind the operation of the EU Common Agricultural Policy (CAP).
Note the impact of minimum price depends on:
- The difference between the market and minimum price
- The price elasticity of supply and demand for the product
Use elasticities to quantify effects. A similar diagram is used to illustrate the effect of EU wide minimum wage legislation. NB: Minimum price has no impact if the equilibrium price is higher than the minimum
Other points to note:
- CAP has ensured adequate supplies but it has incentivised farmers to produce more
- CAP is the single biggest item in the EU budget and is costly to administer
- CAP is a significant obstacle to WTO negotiations to reduce world wide tariffs
The Common Agricultural Policy (CAP) encourages output maximisation. Farmers adopt intensive farming techniques which see traditional small holdings merged into large super fames with the loss of hedgerows and natural habitats for wild animals.
Agricultural economist, Jules Pretty (University of Essex) estimates that the annual external cost of intensive farming in the UK is £2.3 billion on an ex post basis for cleaning up pollution & repairing habitats.