Practice Exam Questions
Policies to Improve Food Affordability (Revision Essay Plan)
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Last updated 1 May 2018
Here is a suggested essay plan to this question: Evaluate the micro and macro policies a government might use to make food more affordable to lower income groups.
Affordability measures whether households have sufficient real disposable income to be able to buy goods and services in the quantities they require. Food affordability has become an important policy issue in recent years across both advanced and emerging countries. In many developing nations, the high price of food is a factor contributing to persistent malnutrition which in turn acts as a barrier to Human Development Progress. In the UK, use of food banks has soared especially for families with children. The Trussell Trust reported that over one million three-day emergency food supplies were given to people in crisis in the UK in 2016/17. Typically, lower-income families spend a higher proportion of their income on food (as well as other essentials such as energy) so effective policies to make food more affordable can have a significant effect on people’s standard of living. Can rising levels of food insecurity (not having access to sufficient affordable, nutritious food) be left unaddressed without one or more interventions?
One macroeconomic policy to improve food affordability might be for the government to lower import tariffs on food imports or relax existing import quotas. My chain of reasoning is as follows: A tariff reduction will reduce the cost of imported food and bring down retail prices for consumers. This would allow families to benefit from food exports from countries that have a comparative advantage in specific food types such as soya-beans and wheat. Lower tariffs would bring prices down as lead to an expansion of demand. The resulting increase in consumer surplus is shown in my analysis diagram. Lower prices lead to higher real incomes.
The extent to which a tariff cut will improve food affordability depends on the extent to which food can be sourced more cheaply from other countries. The UK and other EU members currently levy common tariffs on products imported into the EU from other countries. When the UK leaves the EU in 2020 there might be scope for quite big reductions in tariffs since the average EU food tariff is 11%. But this depends on whether the UK can negotiate free trade deals with non-EU countries and whether they have the supply-side capacity to be able to export cheaper food to the UK. My tariff diagram also shows that lower tariffs might lead to a contraction of domestic farm output unless home-based producers can improve efficiency and lower their unit costs. There is a risk that cheaper for prices via tariff reductions could threaten real wages and employment in the UK farm sector.
An alternative micro strategy would be to provide a production subsidy to domestic farmers in a bid to increase market supply and lower the real prices of food for consumers. The effect of a subsidy is shown in my diagram. A per unit subsidy shifts the supply curve out to the right. Market price falls and quantity supplied in equilibrium increases from. This results in an increase in consumer surplus and producer surplus increases as producers supply more and receive a higher price. (equal to the market price plus the subsidy). If the aim is to lower prices, a subsidy is best targeted at foodstuffs where demand is inelastic so that there is a greater fall in the equilibrium market price. A farm subsidy (perhaps in the form of tax relief) might also stimulate capital investment in the farming industry which might then lead to higher yields - a measure of productivity. If supply increases in the long run and farmers are better able to guarantee output at a lower unit cost, this will flow through to consumers via lower prices and improved affordability.
Although in theory farm subsidies might be effective in making food more sustainable, in practice we often find that subsidies distort the working of the price mechanism leading to a loss of allocative efficiency. Food growers may become overly-dependent on subsidies and the absence of competition can lead to production inefficiencies and lower productivity. Subsidies can result in both government failure including unintended consequences. For example, food subsidies are frequently expensive and can lead to over-production and rising levels of waste. The subsidy might also be spent on fertilizers and farm practices that are damaging to the environment and which - in the long run - might actually damage the food-supply potential of the domestic agricultural industry. Free market economists argue against offering subsidies to reduce food prices believing that market forces will be - over time - the most effective way of growing food at affordable prices.
If lower import tariffs and farm subsidies can be criticised as policies to improve affordability for lower income groups, what else might be tried? Some economists are now making the case for the government to use fiscal policy at a macro level to offer a guaranteed basic income to all families perhaps targeted at those households in the bottom two quintiles of the income distribution. This intervention would take the form of an unconditional cash transfer from the government. It would have a direct effect on the disposable incomes of relatively poorer families who would then be able to afford to eat more and perhaps buy healthier foods to improve nutrition. The idea of a basic income has attracted growing support in recent years and there are currently pilot studies in Brazil, Kenya, Finland and Canada. A variant on this scheme would be to provide a universal income through food stamps so that the transfer would have to be allocated towards buying foods. In the same vein, the government might decide to raise the minimum wage in the labour market or lift the state pension - all these strategies are designed to have a direct (positive) impact on the effective demand of families on low incomes.
Critics of a guaranteed basic income counter by saying that there is no certainty that households in receipt of extra income would spend it on food and that the government would be better off spending what would be an expensive programme costing hundreds of £ millions in other ways for example in cutting the cost of child care or housing. Another argument is that increasing demand for food is not necessarily the main problem for there is an enormous amount of food waste across all income levels and that food agencies should making use of behavioural nudges to persuade people to eat more healthily and cut the amount of food that is disposed of.
Final reasoned comment
Ultimately food insecurity can be best addressed in the long run by having a productive farm sector, competitive retail markets for food and a willingness of a country to import the products that other nations can supply at lower prices. So, I would favour macro policies that keep markets open and encourage growers to be innovative in how they supply food to markets. Vertical farming (often in urban) areas is providing grounds for optimism in showing how affordable food can be grown with a reduced carbon footprint and close to final consumers. That said, affordability is driven not just by price but also income. A guaranteed basic income has been found to reduce malnutrition in pilot studies covering several years in countries such as Canada and Kenya. Poorer families are often hugely rational when choosing how they spend their money. A modest, regular increment to income could have powerful effects.
Figures from the Trussel Trust show that in the year to March 2018, 1,332,952 three-day emergency food supplies were delivered to people in crisis across the UK – a 13 per cent increase on last year.
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