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Economic Inquiry
Volume 33, Issue 3
Pages: 351-524
July 1995
THE FAILURE OF GOVERNMENT‐SPONSORED CARTELS AND DEVELOPMENT OF FEDERAL FARM POLICY
ELIZABETH HOFFMAN , GARY D. LIBECAP
First published: July 1995
Abstract
While economists recognize that private cartels are difficult to sustain, they are too sanguine about the prospects for government‐assisted cartels. Although the state's coercive power would seem to make it an effective enforcer of cartel agreements, the political costs of enforcement can be high of segments of the industry resist. The government's solution lies in alternative strategies for raising prices. Examining government efforts to organize an orange cartel in the 1930s, we find that farmers' opposition to output cuts and quota assignments because of their distributional effects forced a policy she to purchases of “excess stocks.”
Although economists have long recognized that private cartels are difficult to sustain, they generally have been too sanguine in their assessment of the potential for government-built or assisted cartels. The coercive power of the state has seemed to be a natural remedy for forcing agreement and compliance with output reductions and individual quotas when no private consensus can be reached. This View, however, neglects the costs faced by politicians and bureaucrats when the industry is agreement over quota policies. Yet, these are precisely the conditions under which government assistance is asserted to be most necessary. Under these circumstances, a government-sponsored cartel may be no more successful in achieving production restrictions than were private cartels. The advantage of government efforts, as federal agricultural programs make clear, is that there is a much longer menu of alternatives for raising prices, such as government purchases to enhance demand.
As noted in the beginning of the paper, agriculture is perhaps the most heavily regulated sector of the American economy, a process that largely began with the Agricultural Adjustment Act of 1933. Although the focus of that law was on production control and marketing restrictions, political opposition to output controls by various farm groups brought a shift in emphasis to demand enhancement with government acquisitions of ”excess” stocks. Gradually in the 1930s, through the purchase of commodities by the Commodity Credit Corporation and other similar agencies and their distribution through relief, and later, through subsidized exports, food aid, and school lunch programs, the modern character of federal agricultural programs took shape. Government purchases were much more acceptable to influential farm groups than were production and shipping controls in the effort to raise farm prices and incomes. As a broad, generally unorganized group, taxpayers increasingly absorbed many of the costs of federal farm policy.
The case of orange marketing agreements illustrates the distributional conflicts over quotas that can be encountered heterogeneous and there is dis in attempting to establish government-sponsored cartels. Competing views regarding quota design in the proposed cartel prevented a cohesive industry position in negotiating the marketing agreements with the Agricultural Adjustment Administration. Further, the strong political reaction in Florida to the quotas that were adopted by the agency forced repeated modification of the marketing agreements over six years until an acceptable arrangement could be devised. The final marketing agreement, however, had little resemblance to the nationwide cartel outlined in 1933 under the Agricultural Adjustment Act.
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