Question

In Brazil, the government is also concerned about the situation explained in question 1. But it has come to light that many coffee brands are wrongly marketed as fair trade by unscrupulous coffee companies, disguising the low wages paid to bean pickers. Such firms also contribute to groundwater pollution and deforestation by squeezing coffee farmers who need to cut production cost to make a living. Use the theories of market failure and government intervention to explain the reasons for this concern. Identify different suitable government interventions that the Brazilian government may consider. Critically discuss potential problems with these interventions.

Answer 1

Ans) It has been given in the question that much fair trade coffee brands, cause groundwater pollution, deforestation, exploitation of farmers, etc. These are considered as market failures in the production of fair trade coffee. Market failure is when the price mechanisms fail to account for the costs and benefits associated with the production and consumption of a particular good. Market failure is caused due to the inefficiency in the allocation of resources. In the given example we can see that the production of fair trade coffee causes exploitation of farmers, low wages for bean pickers etc. This can be classified as the negative externalities. Negative externality is when the production or consumption of any good (in this case production of fair trade coffee) will lead to a negative effect on the third party. This is considered as a negative spillover on the third party. Along with this negative externality related to exploitation, another market failure is the environmental concerns. The more the production of fair trade coffee it will affect the sustainable development of the environment.More production of fair trade coffee will lead to more negative externality on the environment and people associated with this environment. Ground water pollution is a negative externality caused due to production of the coffee. There is an additional cost incurred due to pollution not the parties concerned but also third parties.

Solutions for this market failures

These market failures has to be corrected for the economic efficiency of the production of this particular commodity. There are different methods and policies that the Brazilian government can undertake. The government interventions and regulations can possibly correct the market failure.

1. The government can impose a ta on the fair trade coffee, to reduce the production and consumption of the good. An imposition of tax will increase the cost of production and thus the price and the quantity demanded will be less.

2. The government can give subsidies to the company to adopt cleaner technology, that doesn't have harmful effects on the environment.

3. Proper regulation an auditing to remove the wage exploitation of labors

4. The government can regulate and audit whether the companies are adopting the minimum wage policy to avoid the wage exploitation of labors.

There are possibilities of problems due to the interventions. The companies can evade taxes which is a serious problem from the market side and the economy as well.