The Common Agricultural Policy of the European Union Assignment

The Common Agricultural Policy of the European Union - Assignment Example In the EU farmers are guaranteed a certain price by their government. This is achieved mainly through the use of buffer stocks. These refer to the previous season’s stocks that were not absorbed by the market hence stored by the governments for future eventualities in the market prices. The government buys excess stock in the market to maintain a certain price if there is over supply and releases extra produce to the market to keep the prices at the agreed rate in case of shortage pushing the prices up (Swinbank, & Tranter, 2004). Whenever there is an overwhelming supply of farm products on the market, the excess supply tends to push down the average prices of the produce leading to reduced profits for the farmers or even end up making losses. The E.U sets quotas for such products so as to protect farmers from these problems. The dairy sector is one such agricultural sector that has set quotas imposed on it by the E.U. A quota is represented on the graph by a vertical supply curve at the time the quota is binding. The response of the producers to changes in prices is asymmetrical. Supply will reduce in response to fall in prices and this is represented by the left side of the quota. On the other side ,the right side, when the price rises the farmers are prevented from raising production making the supply curve to become inelastic in nature. (www.economicsonline.co.uk) The elasticity of the demand curve will determine if the farmers will benefit from the production quota. The farmers will be at a benefitting position after the quota if the curve is inelastic around the initial set price. When a market economy is restricted, the quota that is set on production always leads to quota rents. This can be depicted as the a+b in the graphic representation. They are referred to as rents because the farmers get an extra return of Pd. If the farmers manage to sell or lease their quota rights, it gives a capital value to the quota which is equal to the discounted