cobweb theory - market failure in agricultural markets

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fsk replied on Fri, Jul 25 2008 9:04 AM

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eliotn:

market failure in agricultural markets

In cobweb theory, prices and quantity of some goods change according to a "cobweb".  What is wrong with this theory?

I didn't watch the video.  Agricultural market are nowhere close to a free market.  State subsidies and regulations are a total distortion, in addition to the usual distortions provided by a corrupt taxation system and monetary system.

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Anonymous Coward replied on Fri, Jul 25 2008 11:16 PM

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Couple points.

1. He makes the assumption that farmers would take the prices from a year that had high prices because of a bad crop and use them the following year without taking into account the reasons behind the crop failure. Someone who has the option of growing carrots or beets would look at the prices from the last year as their sole determination of what to grow this year under this model. Also starts Year 0 directly after a high price year without taking into account years -1, -2, -3, etc...
   
2. Futures markets take care of the evening out of the prices much better than a Common Agricultural Policy like he is advocating. If you look at the onion market in the US where there is no futures market and compare it to a commodity with a futures market and evil speculators then you won't see the wild price swings he is describing.
3. The 'cobweb theory' seems to be just a visualization of the way markets determine prices if left on there own so can't really be called a market failure in its own right unless you want to call the entire market system a failure.
4. ???
5. Profit

Nothing wrong with the theory per se just him using it to justify an alleged market failure that needs the government to step in to fix.