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Question 1.
The article calls for public policy initiatives to address animal welfare and environmental concerns associated with dairy farming. With reference to economic concepts covered in this course, explain why the government might want to intervene in the dairy market.
Answer
The dairy farming in Australia is going through the crisis. The dairy products are cheap, and there are a lot of fluctuations that are happening in the markets on both domestic and global front. The farmers are facing financial problems due to this. Also, the dairy cows are being exploited, and the environment is getting adversely affected. So, it is necessary for public policy initiatives to address animal welfare and environmental concerns associated with dairy farming.
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It is depicted in the article that the self-interest of the industrialists in dairy farming is producing inefficient results. For example, it is written in the article that the industrialist is making the dairy cows subject to the continuous cycle of impregnation, and are artificially inducing calving and milking for increasing their productivity. Thus, this is the scenario of market failure as here the allocation of goods and services are not efficient enough for the dairy activities (Harvey, 2013). Improvement is required in this scenario for the betterment of the society. Thus, the government needs to intervene in this.
There are different types of goods in the economy. Common goods or common resources are those that are rival, but they are not excludable. Public goods are those that are neither excludable nor rival (Betz, 2014). The dairy farm is a common resource because it has all the characteristics of the common resource, i.e. it is rival but non-excludable. Rivalry means that when the dairy farm is used by one consumer or person, its availability or usability for other people and consumers declines. For example, the cow has produced milk and a consumer comes and consumes the milk, so he has declined the availability of the cow’s milk for other consumers. Non-excludable means that the consumers cannot be prevented from making use of the dairy farm (Betz, 2014). Hence, it is a common resource. So, a government needs to intervene because if the resource can be used by anyone, so it will get destroyed, and people will make unethical use of it. With government interference, the resource use could be regulated, and it could be used properly.
The process of animal welfare is a negative externality. Negative externality means that the economic transaction’s cost is borne by a third party (Henderson, 2014). The third parties are the people, companies, owners', etc. who are affected indirectly. In the article, it is mentioned that due to the livestock farming, the climate is getting affected so the people who live in that climate are the third parties, and they suffer due to this negative externality. Therefore, if the government intervenes in the dairy farming activities, it could reduce this negative externality by making laws, policies or rules in which the third parties are protected from getting affected by the activities of farming and dairy.
Question 2.
A tax on dairy products is one public policy initiative the government might consider. Perform appropriate economic analysis to explain how a tax could be used to address the animal welfare and environmental concerns raised in the article. Discuss the pros and cons of using such a tax as a policy initiative.
Answer
In the above diagram it is depicted that the demand and supply of dairy products were happening at P1 and Q1. When the government imposed the tax on the dairy products, the price got increased to P2, and the quantity demanded fell to Q2. The social cost, private costs, and the dead weight loss are also depicted in the image above. Thus it is clear from the diagram that by levying a tax on the dairy products, the government is trying to discourage the demand and supply of these products. When they are demanded in less quantity, the producers will not indulge in unfair means of increasing the productivity.
These products have negative externalities as described in question 1. These results in market failure because the producers and the industrialist do not take into account the costs that are borne by other people due to the production of these products (Henderson, 2014). When the buying and selling decisions are made by the producers and consumers in the market, they do not think about the externalities; they are just concerned about the private costs. So, by levying a tax, the government has tried to increase this private cost so that it becomes a consideration for the buyers and sellers and indirectly, the government is trying to remove the negative externalities. As shown in the diagram, when the tax is added to the private cost, it increases up to the level of social cost (Tietenberg, 2016). So, the government has changed this private cost to social cost. Even if the production is happening in a bad way now, the government as resources to rectify it and secondly, with more cost to the producers, the production will automatically reduce. Since private cost becomes the social cost, the market output has become social optimal output. The tax has internalized the negative externality for the producers and consumers.
Such tax policy has cons like it do not add deadweight loss; it is not necessary that the government intervention can solve problems but make it a loss, and then it becomes a government failure; the government does not have perfect information. But the pros of Such tax policy is that it gives rise to tax revenue.
Question 3.
What other public policy initiatives can the government employ to address these concerns? Discuss the pros and cons of these.
Answer
The other public policy initiatives that the government can employ to address these concerns are:
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The government can regulate the production of the dairy products by limiting the number or liters of the products produced. It can set a quota for the production of such products (Bös, 2015). This policy initiative will help in regulating the production, and the producers will not indulge in the unfair mean of production to increase the productivity from dairy cows and the bobby's calves. But, due to the fixing of quota, the supply may fall short of demand, and also there will be an adverse impact on the exports of these products.
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The government can fix rules regarding the productivity, breeding of cows, their impregnation, etc. the government should also follow up on these rules by appointing authority to look at the rules and its following in a proper way (Bös, 2015). The non-followers should be penalized and their license to carry such activities should be canceled by the government. This policy will reduce the unfair practices of producers, but it will put an extra burden on the government as it will have to bear the cost of regulation and it will have to spend extra time on these activities.
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The government should set up inspection teams that will go and observe the practices of production at the dairy farms and the industries. The inspection team should be given the authority to do surprise visitors, cancel the license if they observe unethical practices and penalize the producers. This policy will also reduce the unfair practices of producers but it will put an extra burden on the government as it will have to bear the cost of regulation and the inspectors will have to spend extra time on these activities.
Question 4.
What can we as private individuals do to address these concerns, in the absence of government intervention? Are such private solutions likely to be effective?
Answer
We as private individuals can do the following things to address these concerns, in the absence of government intervention:
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We can increase the quality of the products as well the productivity of the dairy cows by giving them proper care in the form of proper feeding of the animals, letting them graze on the productive lands where they are eating the grass and not the soil. We can also breed the cows and give them proper care so that they give good quality milk. This solution is effective because it is not harming the animals or the environment. But, this solution requires time and patience of the producers.
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We can also reduce the wastages by not indulging in the slaughtering of the bobby calves and other animals. They should not be injected unethically. This will protect the animals and their breed.
But there is a question on the effectiveness of these solutions because the parties that get affected by the externality try to bargain so that they are able to reach an outcome which is more efficient for them. For example, if the demand for the products increases and the productivity is less, the private individuals will start to restore to unethical ways of increasing the productivity from the animals. So, the economic players are self-centered hence private solutions do not tend to last
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Australia, D., 2014. Australian Dairy Industry. Dairy Australia. Available online: www. dairyaustralia. com. au/Industry-information/About-the-industry. aspx.
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Betz, F., 2014. Public Good and Private Good. In Why Bank Panics Matter(pp. 121-134). Springer International Publishing.
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Bös, D., 2015. Pricing and price regulation: an economic theory for public enterprises and public utilities (Vol. 34). Elsevier.
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Harvey, D. and Hubbard, C., 2013. Reconsidering the political economy of farm animal welfare: An anatomy of market failure. Food Policy, 38, pp.105-114.
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Henderson, J.V., 2014. Economic theory and the cities. Academic Press.
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Tietenberg, T.H. and Lewis, L., 2016. Environmental and natural resource economics. Routledge.
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