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

Market failure: Such occurrences might lead to market failure as there is a deadweight loss which arises because of this and a negative externality where the social costs far exceed the private costs. The coffee producers sell the produce at a lower price, however the price should be far more because there is a cost incurred on other producers who are not able to produce more as there is more groundwater pollution and this leads to inefficient utilization of resources. Via government intervention by imposing a tax, etc, the government tries to remove this externality and tries to make social costs equivalent to private costs so that there are no unforeseen situations and goods are priced efficiently.

The Brazilian government can impose a tax on these entities so that the private costs equate the social costs. It can increase the regulatory measures and fine companies who don't adhere to the guidelines of fair trade practices. It can institute minimum wages on bean pickers so that they are not exploited. Make it mandatory to display that the coffee has been produced via ethical means. Ensure that the firms are charged for their groundwater pollution, which would ultimately lead to limited pollution levels.

However potential problems with these interventions are that, the price could be drastically higher, which could limit sales and increase inflation as the price of picking coffee led by the higher minimum wage could increase as the costs of production also increase. Farmers who are much more in need of finances, would be ultimately affected as big companies have several other means of earning. Black market could come into place, where coffee is imported from countries who don't adhere to these practices and thus cheap variants would flood the market which are not as good in terms of quality.