Introduction
A market is a place where business organizations and consumers interact. The organizations provide goods and services to consumers, and they get revenues and profits in return in a resource allocation process. In a free market, the interaction between businesses and consumers is controlled by the forces of demand and supply. The forces determine the prices, the quantity of goods supplied to the market, and the quantity of goods customers buy. In such markets, the government only participates by upholding the rule of law, maintaining the currency value, and protecting property rights. However, it is difficult to establish a free market in which everything operates successfully. This is why government interventions in the markets are important. Governments intervene by making policies such as price regulation, setting of taxes to control the supply of a product, offering subsidies, and directly regulating a market through legislation and by-laws. The main reasons for government involvement in the markets include correcting market failures, improving the economy’s performance, and equitably distributing income and wealth. Example of markets affected by government policies is the agricultural industry.
The Task
Intervention can be done at different levels of the government. Most policies are formulated and implemented by the local governments, state governments or the federal government. In the agriculture market, there was a persistent market failure where price kept going down. This was termed as the Great Depression of the 1930s (Irwin, 2017). Farmers kept on suffering, and there is a time that most of them could not pay their mortgage. More than half of the farmers were unable to pay their loans by 1933. This called for government intervention to correct the market failure (Weimer & Vining, 2017). The federal government intervened by setting minimum prices for agricultural products in the market through price floor.
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Price floors refer to minimum prices for commodities and services that a government sets when there is a belief that the current market prices are unfairly low for producers. These are cases that are beyond the control of producers, and the government must intervene to assist (Weimer & Vining, 2017). In normal circumstances, the market equilibrium price is set by the forces of demand and supply. However, when the supply is high, prices go down, and demand reduces. For perishable goods such as agricultural products, producers will be forced to sell at the low prices to clear their stock (Acocella, Bartolomeo, & Hallett, 2016). The government would intervene by setting prices above the market equilibrium price.
The original government legislation in the 1930s in solving the problem of great depression involved a lot of measures. Besides setting the minimum process for the agricultural products, the government would also purchase surplus products in the market (Irwin, 2017). The problem was caused by too many goods in the market making prices to go down. Therefore, immediate intervention was to reduce goods available in the market. Farmers were also restricted on the volume of products they would produce and acreage. Since then, the government has maintained its involvement in the agriculture market.
The initial legislation policy has undergone several modifications to the current setting of price floors. For example, after 1973, the federal government stopped buying the surplus products and instead improved its implementation of the minimum price legislation. Farmers were guaranteed the target price irrespective of what happened in the market due to forces of demand and supply. For example, if a target price of an agricultural product was set at $5 per unit, but due to market forces the prices fall to $3, the government would pay farmers the $2 to compensate. This move was a protection strategy for both the consumers and the farmers. The buyers would pay less for goods, and at the same time, the farmers were protected by the government so that they do not run at a loss. Other modifications include the Federal Agricultural Improvement and Reform Act of 1996 (FAIR). The purpose of this act was to abolish various programs on price support and instead provide incentives to enable farmers to respond to price signals in the market (Temin, 2016). There was also an emergency aid package that the US Congress passed to increase payment to farmers. In 2008, the Congress also passed a farm bill that raised farmers’ subsidy payments to $40 billion. In this modification, wealthy farmers had their subsidies limited with those whose incomes exceed $750,000 are ineligible for some programs.
Reasons for Government Intervention
The primary reasons for government’s involvement in the market are to achieve equity in resource distribution and to correct market failures. Another role of governments is to ensure efficiency of transactions and other dealings in the market and attract foreign investors. The 1930s great depression in the agricultural market had a huge impact on the country’s economy (Temin, 2016). For a nation whose economy partly relied on agriculture, the GDP reduced remarkably. Farmers were hit harder by the depression. From 1930 to 1933 alone, prices had plunged by about two-thirds. The result was that farmers were unable to pay for subsequent productions. It was difficult for most of them to keep up their mortgage payments and more than half of the farmers’ loans were in default.
Effects of the great depression were both unethical and dangerous to the economy. Market ethical standards require that in a transaction; no party should suffer too much at the expense of another. During normal market price fluctuations, buyers sometimes suffer a little and later on, they get to enjoy during the increase in supply. But during the depression, producers kept on suffering from reduced prices, and it kept reducing to very low prices within a short time. It means that those who had financed their farming process through loans could not even repay the loans from the farm proceeds. Those who solely depended on farming could not meet their daily needs. Agriculture is also one key driver of the countries’ economy. Developed countries depend on the export of cash crop. Therefore, the depression reduced the contribution of farming to the nation’s GDP (Temin, 2016). Because of the two reasons above, the federal government had a role in regaining market control by implementing the price floor legislation. Since then, the agriculture market has been stable.
Despite the motive behind government interventions, any step taken attracts political and public debates. Intervention during the great depression was also a subject of public debate (Taylor, 2013). Politicians and economists remain divided on the cause of the Great Depression up to now (Acocella, Bartolomeo, & Hallett, 2016). At the time, the government blamed the problem on the free market. Lack of market restrictions led to street greed taking control of the market resulting in too many producers than the market could afford. However, most economists denied that free market caused the depression and instead, they argue that it was caused by government intervention. America’s Central Bank had a financial system known as the Federal Reserve, and it is believed to be the main cause of this depression. In an attempt to solve the problem, President Hoover implemented intervention policies that only made the Depression worse (Taylor, 2013). The arguments mean that the public was divided on what caused the market problem and even the intervention strategies of the government.
Implications of the Policy
The aim of the federal government intervention policies was to correct the market prices for the agricultural market. Low prices were caused by the uncontrollable movement of agricultural products into the market. The result of this unbalanced distribution was an inefficient market that was no longer helpful to the economy and farmers. The initial government intervention policies included purchasing the surplus commodities in the market, setting a price floor, and restricting production activities (Acocella, Bartolomeo, & Hallett, 2016). The farmers were also provided with financial aid to cover their costs production. The immediate impact was the restoration of normality in market prices. Supply of agricultural commodities and the efficiency of market operations were also restored.
The Great Depression and policy by President Hoover also served as a learning opportunity for both the nation and other countries. As economists explain, the causes were beyond the free market as the public was made to believe. Government actions through the Federal Reserve also had a large part in the causing the depression (Temin, 2016). Through the intervention policy, the federal government learned much about its role in the market and how it can control operations without interfering with the free market provisions. The initial policy was modified several times to make the market better.
Conclusion
The Great Depression happened within a short time, and its effects were hard on both the farmers and the country’s economy. Despite the cause, it required an immediate intervention that would solve the problem in the short-term and long-term basis. Setting a market price floor was necessary because it would solve the depression immediately. I consider the policy a success in solving the immediate problem. On a long-term basis, the price floor policy and the action of purchasing the surplus commodities was not the best solution. It means that the government would keep on intervening financially whenever there was a market problem. For example, if in any case there was a surplus in the market for a given product, the government would purchase the excess to maintain the target price. It means that the government would be spending more than it gets from the product.
References
Acocella, N., Di Bartolomeo, G., & Hallett, A. H. (2016). Macroeconomic paradigms and economic policy: from the Great Depression to the Great Recession . Cambridge University Press.
Irwin, D. A. (2017). Peddling protectionism: Smoot-Hawley and the great depression . Princeton University Press.
Taylor, J. B. (2013). Getting off track: How government actions and interventions caused, prolonged, and worsened the financial crisis . Hoover Press.
Temin, P. (2016). Great Depression. In Banking Crises (pp. 144-153). Palgrave Macmillan, London.
Weimer, D. L., & Vining, A. R. (2017). Policy analysis: Concepts and practice . Routledge.
