19.19 Under marketing orders instituted during the 1930s and administered by the

Question

19.19 Under marketing orders instituted during the 1930s and administered by the U.S. Department of Agriculture, orange growers in California and Arizona have been successful behaving as a cartel in the fresh orange market. Despite the ability of California and Arizona growers to rely on market- ing orders to cartelize the fresh fruit market, explain why, from a general equilibrium perspective, marketing orders have had only a limited effect on grower profits because of the fact that fruit can be diverted to secondary, processed food markets such as orange juice concentrate.

Explanation / Answer

Marketing orders restrict the sale of agricultural produce, and, raise the price of products to the detriment of consumer welfare, and, free market competition. Federal Government, and, the USDA have artificially reduced output, and, undermined production and sale of agricultural products. US agricultural industry has faced an economic boom in the new millennium but perishable fruits market has not gained that much. Consumers have low confidence in food quality. The market has had shortages and glut due to these policies; but processing firms and retailers buy from these producers directly at low prices, reducing the impact.

The cartel must keep prices high, limit produce, and, keep out new entrants into the market. Oranges have close substitutes, including orange juice. Substitutes keep the demand inelastic. This limits the price increase owing to limiting of supply.

Marketing orders are supposed to act as profit maximizing cartels. The Agricultural Marketing Agreement Act was for the stabilization of markets through Government sponsored cartels in public interest. Economist reject the notion that Government cartels can result in higher economic growth; Government restrictions should be rejected as these can be economically harmful.

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