Externalities and anti-capitalism

Economists are currently telling us that New Zealand is living through the longest commodity boom for over 40 years, and that this is being reflected in rapidly rising income for dairy farmers.

At the same time though, domestic food prices are rising at 3-4 percent per year, with a particularly sharp increase in prices for dairy products. For example, butter prices have recently increased by 23 percent, with further increases likely in the near future.

Economists argue these price increases are due to an increase in global commodity prices, and New Zealand consumers should pay the going international rate. This may make economic sense, but does it make political sense?

Already dairy farming has something of a public relations problem due to the fact that it leads to higher nitrate levels in groundwater and waterways and consumes greater amounts of water than sheep farming or grain growing. In Eastern New Zealand, the water requirements of dairy farming are made worse by the fact that windbreaks would protect the ground from drying westerly winds are being removed to allow for extra wide sprinklers.

If dairy farmers were struggling, then the public might be a bit more sympathetic.However, the country is subsidising dairy farming, but dairy farming is not giving anything back in return. If I can no longer fish in my local river because the water has been fouled or extracted by a dairy agro-business, why shouldn’t I be compensated in some way?

This is not just a fairness issue. Arguably the biggest problem with un-patriotic, laissez-faire policies is that for every action there is a reaction. If New Zealand businesses are allowed to pass on their externalities to the general public, without giving back anything in return, then more people will switch support to support left wing parties that see businesses as unpatriotic and selfish players which should be heavily taxed and regulated.

Subsequently, if the business sector comes forward with a worthy proposal, that is in the national interest, such as tax write-offs for research and development, fewer voters are likely to be supportive. Rather than tying dairy farmers down in red tape, as Labour and the Greens appear to advocate, why not ensure that New Zealand consumers get access to cheap dairy products.

This would cost the dairy industry little in economic terms, and would help ensure that the country’s increasingly urban population continues to have good relations with the farming sector.