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 tradeby 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

There is a market failure occurring in this market led by negative externality as the private costs are far lower than social costs. Social costs are higher because of greater levels of pollution caused by the firms, which has increased cost of production, led to low produce, and higher expenditure on healthcare,etc. This has led to a market failure as goods are not priced efficiently. There needs to be government intervention via imposition of taxes, etc so that such forms of production are avoided in the long run.

The Brazilian government can consider intervention by means of increasing fees and fines so that coffee brands have to adhere to the rules and regulations and thus are able to market their products scrupulously and if consumers and other competitors find that they are not doing so, than there could be a huge fine, which could deter such behavior amongst firms. The government can also impose minimum wages so that bean pickers are paid a fair wage and there is no discrimination. Imposition of a tax so that the social costs are equivalent to the private costs.

However, there may be several problems with these interventions as it could increase the price of the product, increasing the level of inflation and making it costly to produce such goods. This could limit the level of competition as major producers and firms will be able to survive because of economies of scale, but smaller producers won't be able to do so. It could make bean pickers worse off as labor demand would be less than labor supply. It could lead to the prevalence of a black market which could further reduce the demand for such ethically produced coffee.