July 9, 2008

Quotas are everywhere in the free market - so why not for coffee?

I wrote yesterday about the crisis facing the global coffee market and the day before about child slavery in the cocoa industry. How to deal with these issues is something that may be relevant for the Simultaneous Policy.

There are efforts to address the coffee crisis, with a new International Coffee Agreement currently being ratified by governments that have signed up to it in principle. One thing the agreement does not talk about is using a quota system to better match supply and demand. Over supply, something exacerbated by companies such as Nestlé encouraging farmers in Vietnam and China to enter the market, keeps prices so low they are sometimes below the cost of production.

Quotas are not liked by business. Nestlé alternative suggestion is that consumers should drink more coffee. But when you think about it, we are surrounded by markets that run with quotas to make them more effective.

Quotas have a whiff of central planning about them, which is perhaps why they may promote a negative reaction. The example of the former Soviet Union, with shortages and appalling environmental impacts, is not a good advertisement for that. There were problems with quotas for coffee in the past and the Common Agriculture Policy pursued by the European Union has proved difficult to update to correct its failings.

But we see quotas in many other places. In 2000 the UK government conducted an auction for part of the electromagnetic spectrum in the form of licences for G3 mobile telephone services. The available spectrum was split into 5 packets to be licensed separately. In part there was a technical limit on how the frequency ranges could be split, but there was also a desire to open the market, which was currently dominated by four companies. The 5th licence was reserved for new operators, who could also bid on the others. There were 13 bidders trying for licenses at the outset. In such a market, there cannot be a free for all. There needs to be a quota set. See:

There is a similar situation with slots at airports. There are physical limits on how many aircraft can be processed taking off and landing. There may also be political factors, such as the amount of noise that surrounding residents can be expected to put up with, which may further reduce slots. Slots become highly sought after. Indeed, it was suggested recently that airlines in Brazil were keen to take over Varig, which went into administration, because of the value of its slots as much as for its other assets. These could perhaps be seen as the buying side of the equation. Companies wanting access to a scarce resource to be able to do business, be it electromagnetic spectrum or space at the airport.

In many countries taxi services are regulated, which is more the sellers side of the equation. Taxi drivers want a license to be able to offer their service. The number of taxis that are licensed is often limited. Too many taxis would result in none being occupied as optimally as it could be, meaning empty vehicles on the roads and low incomes for drivers, possibly with consequent social effects. Too few taxis and those who want one might be disappointed or the charges may become extortionate (though it often seems to be the case that the rates taxis can charge are also fixed). There are other considerations, such as the need for the number of taxis and charges to be attractive to encourage people to leave their cars behind, while still making bus journeys more attractive still (as they cause less congestion and pollution). So a quota system is set with the aim of satisfying the sellers (the drivers) and the buyers (would-be passengers). Licensing can also be used to provide quality control (by requiring drivers to show knowledge of the city) and security (as passengers know the stranger whose car they enter is on a register). There can be failings to the system. It is in drivers interest to keep the number of licenses small. But with local control over numbers, there should be democratic recourse for passengers to change the situation.

Another situation where quotas are commonplace and accepted, though also often controversial, is with planning permission. In the UK, town and city councils put limits on the number of supermarkets that can open. Possibly this may be due to a physical limit on available land, but is more likely due to political factors, such as wanting to limit car journies to out-of-town sites and to maintain commerce in town centres, which are more communal, and protect local shops, which may be the only choice for the elderly, infirm and those with limited transport options. Consideration of a planning application from a supermarket chain can raise strong feelings, both for and against. A responsive local democracy will aim to resolve the conflicting demands in a transparent way.

There are no doubt many other examples of where quotas are an accepted part of the market in which businesses operate. There are also, of course, many cases where quotas are unnecessary and a free market operates successfully (though free markets are often still regulated in other ways to protect consumers and ensure fair competition).

So considering a quota system for certain resources, such as coffee, where oversupply puts many farmers into an insecure position, is not so extreme after all.

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