Green's (bad) economics

The following is from a report from Radio New Zealand News on the Green's annual conference.

Meanwhile, Green Party co-leader Jeanette Fitzsimons has thrown down a challenge to Fonterra to sell its dairy products at a price New Zealanders can afford.

And what price can they afford? If consumers are buying they must be able to afford it - after all they bought it! If customers were not buying then there would be an excess supply and the price would drop, but its not. So we must assume that supply equals demand and people are buying the quantity they want. Also if she really wants to guarantee that all New Zealanders will be able to "afford" dairy products would the price not have to be zero???

At the conference on Saturday she said Fonterra makes so much on its exports it can afford to make less profit on the 4% it sells in New Zealand.

The party is challenging Fonterra to cap the cost of milk for New Zealanders and uncouple its domestic milk price from international levels.

But if they did that then the New Zealand market would get little in the way of supply. If the international price is greater than the local price, where do you sell your milk? Why would anyone supply the local market when they can get more overseas? Such a policy would reduce the payouts to farmers. Why should farmers suffer such a loss of income via having to pay, what amount to, a subsidy to New Zealand consumers? In addition such a move would be inefficient. If milk is being forced to be sold at a lower price in the local market then it is not going to those who value it most highly, and this is allocatively inefficient.

Later it is stated that

She [Fitzsimons] says a major driver of milk and cheese prices is the link to global markets. She says low income New Zealand families are competing with wealthy commodity traders in much larger countries for a product grown just down the road.

She is right, but this is true of all goods. If we trade the good then we compete with people all over the world, if we don't trade the good we still compete with all other people within New Zealand. Low income New Zealand families still compete with someone for goods, no matter what. The consumer price would be lower because of less competition, just New Zealand competition rather than worldwide, but the lower price may also lead to less supply, which would mean a higher price being paid by consumers. A lower price would mean lower profits and hence fewer firms entering, or more firms exiting, the market which reduces supply.

Where the goods are grown isn't the issue, its where they are sold that is the point and they will be sold where they make the most profit. Should goods grown in Canterbury be cheaper in Christchurch than Auckland? The answer is yes if you follow the Fitzsimons "logic". But why should a Canterbury producer be denied income because of such a policy?

Later the RadioNZ piece claims

However, Federated Farmers is dismissing calls for a two-tier structure for milk prices, saying the Greens are displaying a poor grasp of economics and increasing dairy production costs need to be paid for with export dollars.

And they have a point. Costs will be increasing as the dairy industry expands in response to increased international prices and this expansion has to be paid for. As the industries expands it demands more inputs, land cows etc, and this increased demand drives up prices for these inputs.

The Federated Farmers chairman of dairy, Frank Brenmuhl, is also reported to have said

[...] if food or dairy needs to be subsidised for the good of the public it is not the role of farmers to do that.

Here he is also right. If there are reasons for wanting greater consumption of dairy, or other foods, then this is not the role of farmers. Other policy measure should be used as its not clear that the Green's policy would be the least inefficient way of achieving the end. Other policies may be better, for example the government could use a (Pigovian) subsidy or make an income transfer to the groups it wishes to help.