Rising Food Prices In Canada: Private Sector Contributing Factors And Government Intervention

Food Production in Canada

Question:

Discuss about the Impacts of Food Supply by The Canadian Private Sector.

Food in Canada is produced both through large and small scale farming. Production mostly take place in the rural areas though there are some farmers who produce the urban areas in green houses. Production in the urban areas has become an important booster to the food supply. Most urban people depend on the food produced in the rural areas. Now the issue is that food prices have gone up during the past years and are eating much of the households’ income; many peoples’ standard of living has been undermined by the high food prices.  This paper therefore will consider how the provision of food by the private sector has contributed to the rise in prices. Data for the past 5 years will be used in this study to show the changes that has taken place in the food market. According to Alini (2017), the spending at the grocery is eating more of the consumers’ income as food stuffs has become more expensive. The average monthly spending on buying food from Canadian groceries is $ 200. This in on a range of $186 to $254 depending on the locations. Those on big cities are the ones spending approximately $254; the least spending is $186 on areas like Nova Scotia. The costs are higher for bigger families than for smaller families (Cic.gc.ca, 2017). Based on the fact that the poor families tend to be bigger than those for the richer groups, the poor are the most affected group (Alini, 2017). At the appendix is a chart showing the price changes for the past years for the most common food stuffs bought on the Canadian groceries.

The demand for food stuffs is inelastic to price; these things are necessity goods that have to be purchased no matter the price level (McTaggart, Findlay & Parkin, 2012). However, foods stuffs are normal goods, an increase in price causes the demand to fall and vice versa. However, the fall in demand from a rising food stuff price is insignificant. Most food stuffs have no close substitutes, they only have some complements. This explains why consumer suffer from high food prices. The general price for all food stuffs have escalated as observed in the past 5 years.

There is little government intervention in the food market; this paper discusses whether it would be more efficient to incorporate government intervention in the supply of food or to leave the supply on the hands of the private sector without intervention. There are many families struggling with food issues; the government is not offering sufficient help to these families. Government intervention would ensure that food is available to every Canadian and at a lower affordable price.

Food Prices and Household Welfare

The market equilibrium price and quantity is Pm and Qm respectively. The price is lower and the quantity level is higher; the supply curve is Sm. The private sector’s price is higher at Pp; at this high price, the good is undersupplied by the private sector (Slavov, 2013). The small reduction in quantity demanded does not represent increased efficiency, the fall is small because demand is price inelastic and supply is price elastic (McEachern, 2014). Thus it represents a loss of social welfare. The consumer surplus is lost by Pp,a,b,Pm; this loss in consumer surplus is the gain in producer surplus. A deadweight loss acd is experienced as a result of selling food stuffs at price Pp (Landsburg, 2014). A high price for food stuffs causes undesirable externality in the market (Riley, 2015).

There is an externality in the provision of food stuffs by private sector. Pluta (2011) noted that market failure is the primary rationale for government intervention. The price they charge is higher and is taking up a high proportion of consumers’ income. Their living standards are lowered as a result and thus a loss of social welfare. The private sector is therefore unable to maximize the social welfare. The inelastic nature of food stuffs and the increased necessity is thus requiring a government intervention.

The intervention by government is always meant to raise the social welfare by ensuring that goods are available to the consumers in plentiful and at an affordable lower price. Most families are suffering from the high prices are calling upon the government to intervene to ensure that the prices are lowered. There are several options the government can impose to bring down the prices. However, these options has their pros and cons.

The private sector equilibrium price and quantity is Pp and Qp respectively. The price with government’s intervention falls to Pg and quantity level rises to Qg. Consumer surplus rises by Pp,a,c,Pg; the producer surplus is also reduced. If the price after government intervention are equal to the market price, the deadweight loss is eliminated and consumers’ welfare is maximized.

The right choice of policies ensures that the prices charges are fair and benefits all the parties involved without making any party worse off. Some options only make the consumers better off but the producers are made worse off. Since the aim of government’s intervention is to bring the prices down, the options are most likely to make consumers better off and producers worse of if they are not chosen wisely. Some policies can results in an increased demand of the foods stuffs and a shortage may be created due to insufficient supply.

Inelasticity of Food Demand

One of the best options suggested by many economists is the implementation of a price ceiling on food. This will ensure that food will be affordable to all income groups. A price ceiling will ensure that the price rise on food will not go beyond a specified price that is considered fair for both the households and the producers. It is fixed above equilibrium price and thus immediately it is set, the food stuff prices will rise to this level, consumers’ will lose in the short run whereas the producers will benefit. In the long run where input prices will be higher and consumers’ income increased, producers will lose whereas the consumers will benefit.

The quantity supplied with a price ceiling would be lower than market quantity Qm but higher than private sector quantity Qp (Mankiw, 2016). Price Pr is lower than private price Pp.

The other option is subsidizing the producers to make them sell at a lower price. The government may give subsidy to the producers to ensure they produce a higher level of output and sell at a lower price. An example in the maize subsidy employed in Kenya due to the maize shortage; there was a significant cut in price whereas the supply was maintained at a higher level. This would benefit the producers significantly and also the consumers if only the price cut is below the equilibrium level.

The government can directly fix the prices for food stuffs at a lower level. This will benefit the consumers since they will spend less income, but it will hurt the producers since the input prices may be higher. There will be a shortage since the low price will make food stuffs more affordable and demand will rise significantly; however, the supply becomes inelastic to demand changes. Suppliers will make losses from selling at a lower price.

Lowering personal tax to raise households’ income; with a higher income level, the households will be able to cope with the rising prices. This will benefit both the consumers and producers. This could also be by offering income assistance to the low income group and the unemployed to enable them place their demand (Clure, 2017). However, this will raise the demand and the suppliers will raise the price further.

It is essential for the government to intervene in the food stuff market. The government should choose its options wisely to ensure that it derive much benefits to the consumers without significantly impacting the producers. The cheapest and best policy should be to implement a price ceiling on food stuffs; the products will be made more affordable in the future. Tax cut and income assistance is the next best option. The other policies are less effective; for instance determining the producers to receive the subsidy may bring issues.

Conclusion

• If the government does not intervene in the food supply issue and leave it to be supplied by the private sector, the households will continue suffering since they will continue paying high prices.
• There is thus a need for the government to take action to ensure that there is a reduction in the food stuff prices.
• If an intervention policy of the government is implemented, the prices will fall and the market will be more efficient since the negative externality will be internalized.

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Clure, E. (2017). Power prices: 13 ways government could cut electricity costs. ABC News. Retrieved 10 October 2017, from https://www.abc.net.au/news/2017-08-11/what-could-the-government-do-to-reduce-power-prices/8790952.

Landsburg, E. (2014). Price theory and applications. Stamford, CT: Cengage Learning.

Livingin-canada.com. (2017). Canadian Food Prices. Livingin-canada.com. Retrieved 10 October 2017, from https://www.livingin-canada.com/food-prices-canada.html.

Mankiw, G. (2016). Principles of macroeconomics. Australia: Cengage Learning.

McEachern, A. (2014). Economics : A contemporary introduction. Australia: Cengage Learning.

McTaggart, D., Findlay, C. & Parkin, M. (2012). Microeconomics. Sydney: P.Ed Australia.

Pluta, E. (2011). Human progress amid resistance to change. Victoria, BC, Canada: Friesen Press.

Riley, G. (2015). Public Goods and Market Failure. tutor2u. Retrieved 10 October 2017, from https://www.tutor2u.net/economics/reference/public-goods.

Slavov, S. (2013). Public versus Private Provision of Public Goods. Onlinelibrary.wiley.com. Retrieved 10 October 2017, from https://onlinelibrary.wiley.com/doi/10.1111/jpet.12058/abstract.

Statcan.gc.ca. (2017). Food and other selected items, average retail prices (Prices). Statcan.gc.ca. Retrieved 10 October 2017, from https://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ155a-eng.htm.