The Common Agricultural Policy

a series of measures regulating agriculture in the EU
agriculture is supported because of the instability of agricultural prices in a free market
and because agriculture is such a strategic industry

Objectives of CAP

To improve agricultural efficiency
To ensure a fair standard of living for those who work in agriculture
To stabilise the agricultural market
To ensure enough food is produced in the EU
To ensure affordable consumer prices

Measures taken under CAP

Price support(more later)
Production subsidies (money for producing food)
Investment grants
Direct income payments (unrelated to production i.e. for being a farmer)
Conservation measures
Health regulations

Price support

The CAP sets prices for agricultural product above the world equilibrium price. This leads
to excess supply than would otherwise be produced and consumer prices higher than
would be expected in a free market.

CAP buys up any surplus and stores or destroys or exports at low subsidised prices the
excess.

In addition a tariff (import tax) is imposed on any foods from outside of the EU.

Disadvantages

Food is more expensive than it might otherwise be
Disincentive to for farmers to become more efficient
Distorts the signalling effect of the price mechanism
An opportunity cost exists with tax spent on subsidies and storage rather than something
else
The tariff makes it difficult for developing countries to export into the EU

Why have CAP?

A standard pan EU policy rather than individual member state policies towards agriculture
Leads to employment particularly in areas with high % of agricultural workers
In effect makes marginal land viable and therefore protects the environment
Encourages investment in the long run.


Critisms of the CAP

Expensive to operate
Reduces competitive pressures
Small and inefficient farmers survive
Diversification is not encouraged
Leads to higher prices and taxes for the public
Unfair competition for developing countries
Misallocation of resources (allocative efficiency isnít as great as it could be)
Can damage environment where land is turned over for agriculture rather than left for
wildlife


Reforming CAP

Internal pressures form countries with efficient agriculture and from consumers has
placed pressure for the EU to reform.
Enlargement of EU with countries with high % of agricultural workers and inefficient
farming places an increasing strain on EU budget
The World Trade Organisation (WTO) wants the EU to open up markets so that developing
countries can compete on a more level playing field.

Reforms

∑ The support prices were reduced
∑ Moved emphasis of CAP away in part from subsidies to farmers to direct income
payments
To qualify farmers had to set at least 15% of arable land aside (to fallow land)
Grants given to convert arable land to forestry, recreational use or for ecological
purposes
(these measures led to some degree of corruption)

1999 Reforms

these reforms reduced agricultural prices but increased direct income payments to
farmers

this led to a reduced burden on consumers of food towards an increased burden to
taxpayers

Benefit was that
a more equitable distribution of resources within the EU
made EU agriculture more open to competition

Agenda 2000 Reforms

Under concern about enlargement support prices were again reduced and greater
emphasis put on direct income payments and environmental objectives