Negative Effects of Agricultural Price Regulation

Abstract

The prices fulfil many functions in the market economy. The main ones are information, allocation and income distribution. This is why they are seen as a crucial category in economics and they are a matter of interest of buyers and sellers. This refers also to farms. The paper is theoretical in character. Its goal is to present and discuss negative consequences of setting prices for agricultural products on higher levels than it would be on purely free market, as well as of keeping stable agricultural prices by the state. The paper discusses the cost theory of prices, subjective theory of prices, the market functions of prices, the goals and forms of state intervention in agriculture, and the negative consequences of the interventions aimed at raising and stabilisation of agricultural prices. It was revealed that, while improving the economic situation of farmers, these interventions decrease the social welfare while contributing to increase in production over the level of the market equilibrium, non-optimal (from the customers’ point of view) allocation of the factors of production, higher taxation of the other sectors of the economy, use of too large areas of the land, increase of employment in administration (that is keeping people away from more productive work), lowering the level of farmers’ entrepreneurship and innovativeness, discouraging farmers from lowering their production costs, problems with eliminating not economically viable farms from the market, and decreasing the farm owners’ attempts aimed at lowering their dependence on environmental conditions.