MARKET FAILURE A
A primary characteristic of a competitive market is that there are a large number of active buyers and sellers on both sides of the market. But the production process for many products is such that plants must be large (and thus fewer in number) in order to produce at minimum cost. process many.) Farm equipment manufacture, fertilizer manufacture, petroleum refining, and food processing all represent cases in which technology dictates relatively small numbers on one side of a market. In these cases a large number of both buyers and sellers is not possible and a balance of buyers and sellers is unlikely. Power to price at a level other than cost is conveyed to firms on the small numbers side of the market. The oligopolist (one of few sellers) may price above cost to the disadvantage of buyers, and the oligopsonist (one of few buyers) may price to the disadvantage of sellers.
Even in cases where the economies of size are quite limited (e.g., retail fertilizer dealers or country elevators) the spatial dimension of a market may result in an imbalance of market power. The least-cost organization of firms marketing farm products and supplying inputs to farms may mean there will be only one firm in the best position to serve any given farm. The cost of assembly conditioning, storage, and shipping of grain is illustrated in Figure 8.2. Note that the average cost per unit handled through an elevator decreases as the plant size increases.(Chase, et al). Also, the average cost of getting grain from farms to the elevator increases as the elevator size increases because the grain must be assembled from a larger area. The plant size that minimizes the total cost of assembly and processing is often smaller than that which would minimize the cost of conditioning
Figure 8.2 Costs of assembly and processing
, storage, and shipping functions. More than one elevator at the same site would result in higher costs than those that would accrue if the same volume were handled in one facility. A cost-efficient system would have elevators serving nonoverlapping areas, and the individual farmer would have access to more than one buyer only by incurring added transportation costs. Even despite the appearance of large number of elevators, there remains some possibility for prices to deviate from costs
An efficient market also depends on the availability of information needed for efficient exchange and production. Having alternative trading partners is of no consequence unless the terms of trade available from each are known and understood. Information is available only at some cost, because it is not always in the best interest of buyers or sellers to facilitate the comparison of their prices or of any other aspect of their offers. Thus the cost of information, like the cost of transportation, may be the source of market imperfection.
Ideally, market prices provide all the information needed by firms to make appropriate decisions about what to produce (kind and quality), how much to produce, and what combination of inputs to use in production. A system of perfect markets would deliver the quantity and quality of goods at the time and place necessary to be of highest value to the ultimate consumer. However, the ability of market price to accomplish this task is complicated by a number of factors. In some cases a product attribute that is valued by a user can only be determined by inspection or testing that
20:24 May^^
destroys the product. Some of these attributes may be determined and controlled only as part of the production process ,and the user must therefore specify the production process to guarantee the quality of the product delivered. The need such additional specifications increases the cost of market transactions, which may include inspection of processes and contract enforcement. These factors complicate the market exchange process and increase the likelihood of a failure of markets to attain the ideal. .
Each of the problems cited above presents an incentive for firms to extend their activities into another level of the system and to internalize al location decisions that might have been left to an open market. This internalizing may be accomplished by using contracts or by combining succeeding activities in the market channel into one firm. An operating cooperative represents form of integration of farm production and other stages in the system. Bargaining cooperatives generally use contracts to deal with market failures. The sections to follow provide more examples of specific situations in which cooperative action might benefit farmers.
MARKET FAILURE A
A primary characteristic of a competitive market is that there are a large number of active buyers and sellers on both sides of the market. But the production process for many products is such that plants must be large (and thus fewer in number) in order to produce at minimum cost. process many.) Farm equipment manufacture, fertilizer manufacture, petroleum refining, and food processing all represent cases in which technology dictates relatively small numbers on one side of a market. In these cases a large number of both buyers and sellers is not possible and a balance of buyers and sellers is unlikely. Power to price at a level other than cost is conveyed to firms on the small numbers side of the market. The oligopolist (one of few sellers) may price above cost to the disadvantage of buyers, and the oligopsonist (one of few buyers) may price to the disadvantage of sellers.
Even in cases where the economies of size are quite limited (e.g., retail fertilizer dealers or country elevators) the spatial dimension of a market may result in an imbalance of market power. The least-cost organization of firms marketing farm products and supplying inputs to farms may mean there will be only one firm in the best position to serve any given farm. The cost of assembly conditioning, storage, and shipping of grain is illustrated in Figure 8.2. Note that the average cost per unit handled through an elevator decreases as the plant size increases.(Chase, et al). Also, the average cost of getting grain from farms to the elevator increases as the elevator size increases because the grain must be assembled from a larger area. The plant size that minimizes the total cost of assembly and processing is often smaller than that which would minimize the cost of conditioning
Figure 8.2 Costs of assembly and processing
, storage, and shipping functions. More than one elevator at the same site would result in higher costs than those that would accrue if the same volume were handled in one facility. A cost-efficient system would have elevators serving nonoverlapping areas, and the individual farmer would have access to more than one buyer only by incurring added transportation costs. Even despite the appearance of large number of elevators, there remains some possibility for prices to deviate from costs
An efficient market also depends on the availability of information needed for efficient exchange and production. Having alternative trading partners is of no consequence unless the terms of trade available from each are known and understood. Information is available only at some cost, because it is not always in the best interest of buyers or sellers to facilitate the comparison of their prices or of any other aspect of their offers. Thus the cost of information, like the cost of transportation, may be the source of market imperfection.
Ideally, market prices provide all the information needed by firms to make appropriate decisions about what to produce (kind and quality), how much to produce, and what combination of inputs to use in production. A system of perfect markets would deliver the quantity and quality of goods at the time and place necessary to be of highest value to the ultimate consumer. However, the ability of market price to accomplish this task is complicated by a number of factors. In some cases a product attribute that is valued by a user can only be determined by inspection or testing that
20:24 May^^
destroys the product. Some of these attributes may be determined and controlled only as part of the production process ,and the user must therefore specify the production process to guarantee the quality of the product delivered. The need such additional specifications increases the cost of market transactions, which may include inspection of processes and contract enforcement. These factors complicate the market exchange process and increase the likelihood of a failure of markets to attain the ideal. .
Each of the problems cited above presents an incentive for firms to extend their activities into another level of the system and to internalize al location decisions that might have been left to an open market. This internalizing may be accomplished by using contracts or by combining succeeding activities in the market channel into one firm. An operating cooperative represents form of integration of farm production and other stages in the system. Bargaining cooperatives generally use contracts to deal with market failures. The sections to follow provide more examples of specific situations in which cooperative action might benefit farmers.
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