ARG-049

The following appeared in a letter to the editor of a Batavia newspaper.

"The department of agriculture in Batavia reports that the number of dairy farms throughout the country is now 25 percent greater than it was 10 years ago. During this same time period, however, the price of milk at the local Excello Food Market has increased from $1.50 to over $3.00 per gallon. To prevent farmers from continuing to receive excessive profits on an apparently increased supply of milk, the Batavia government should begin to regulate retail milk prices. Such regulation is necessary to ensure fair prices for consumers."


Write a response in which you discuss what questions would need to be answered in order to decide whether the recommendation is likely to have the predicted result. Be sure to explain how the answers to these questions would help to evaluate the recommendation.


According to the letter, the author recommends that the Batavia (B) government begin to regulate retail milk prices in order to ensure fair prices for consumers. Although the author’s conclusion seems reasonable, there are questions regarding the lines of reasoning that requires further analysis, and the argument could end up being pretty convincing or invalid in the end, depending on the answers to those questions.


First, the first set of questions we would like to ask concerns whether B's milk production has actually risen. If it turns out that the increase in the number of farms is due to the fact that large farms have been split up into smaller ones, or that despite the increase in the number of farms, the extra milk production capacity has been used to produce other, high value-added products, such as cheese, cream, yogurt, etc., then it is difficult to believe that B's milk production is rising, and therefore the author’s conclusion is untenable. Otherwise, the author’s conclusion would be strengthened.


Second, even if B's milk production did rise, it is not clear to us that the rise in the price of milk at the local Excello Food Market was necessarily due to prices inflated by local farmers seeking to reap windfall profits. As we know, commodity prices are influenced by supply and demand and the value of currency. Even if we acknowledge that the supply of milk does increase with more farms, has the local demand for milk also risen? If the answer is yes, then we cannot attribute the rise in milk prices to farmers wanting to make a windfall profit. If it turns out that the rate of milk price increase does not exceed the rate of inflation, then the recent price increase is just a normal market law and not a deliberate attempt by the farmers. Thus, the author’s conclusion is weakened. If, however, the rate of milk price increases substantially exceeded the rate of inflation, then the author’s conclusion would be strengthened.


Third, even if the rise in milk prices is indeed due to price inflation by farmers, is it necessary and feasible for the government to control milk prices? First, before considering controlling the price of milk, the government could consider other, better strategies, such as reducing the burden on businesses, such as lowering taxes, so that the cost of milk will naturally come down. If these options were feasible, then the options the authors mention in this letter would not need to be implemented. Even if government regulation is the only solution to soaring milk prices, we are not sure of the feasibility and effectiveness of such a move. It is very likely that, due to government restrictions, milk manufacturers would decide that they could not make a satisfactory profit and would withdraw from the market, and eventually the supply of milk would exceed the demand. As a result, although the price of milk is lower, consumers can no longer buy it, which defeats the purpose of government control. If this were the case, the author's conclusion would be weakened.


In conclusion, we can only fully evaluate the author's argument and come to a logical conclusion when all the above questions are addressed.

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