In 1692 when the Pilgrims left London bound for Halifax
aboard the Niña, the Pinta and the Santa Maria, they brought with them 100 head
of dairy cattle. By 1776, when Canada separated from England to become the 51st
state, the dairy cattle roamed wild over most of the prairies.
There is a very good reason that economists don’t comment on
history – it is not our field of expertise.
One must wonder, then, how accurate an op-ed piece that
appeared in the Vancouver Province could be. The piece was a critique of a
Fraser Institute study on milk marketing boards. It was, however, written by a
historian.
In his effort to critique, our historian has made two errors
that are common to any first year student. The first is the difference between ‘cost’
and ‘price’. The second is the difference between ‘demand’ and ‘quantity
demanded’.
‘Cost’ refers to the market value of all of the inputs used
in the production of a product. ‘Price’ is how much a consumer pays for the
product, and is based on the consumer’s perceived value. When price exceeds
cost, the producer earns a profit. Price can be determined either through a
market system or by direct government control. Minimum wages are an example of
government controlled pricing.
‘Quantity demanded’ is how much consumers will purchase at a
particular price. ‘Demand’ is the relation between quantity demanded and ALL
possible prices. The definitions of ‘quantity supplied’ and Supply are similar;
referring to the amount that firms are willing to sell. Quantity supplied can
equal quantity demanded, but supply can never equal demand. This many sound
like semantics, but it is the key to understanding how markets actually
function.
In his op-ed piece, Professor Muirhead states that, under
supply management, “domestic demand is matched with domestic supply”. Disregarding the aforementioned error in
terminology, equating quantity demanded and quantity supplied is exactly what
the market mechanism does through changes in price. When government determines
the maximum amount that can be produced, the market still determines the price.
Thus, comparing the price of milk between supply management and market
determined is not like comparing apples to oranges. It’s comparing milk to milk.
The key element missing from the article is the side effect
of supply management. To restrict the quantity produced, and thus increase
price, governments issue quotas, or licenses to produce. Because the restricted
supply raises the price of milk, more farmers would like to enter the dairy
industry. They can’t, however, without obtaining a quota. If there is a demand
for the quotas, and there is a limited supply, then the quotas themselves have
value. Each time a Canadian buys milk or cheese they contribute to the
profitability of these quotas. In a study done several years ago, the single
largest cost of dairy producers was the acquisition of the quota.
Getting rid of supply management and compensating the existing
producers for the value of their quotas would almost certainly reduce milk and cheese
prices. With some notable exceptions, free markets are always more efficient
than government intervention. Milk markets are not one of these exceptions.
Need more evidence? Ask the Venezuelans about toilet paper.
Thanks to my colleague
JM for bringing this article to my attention.
