A landmark discussion of agricultural policy in Australia. Written in 1982, Ted Sieper asks ‘who gains’ with respect to any regulatory instrument and answers the question by means of economic analysis.
Theories of Regulation: The ‘public-interest’ theory
The traditional, and until recently formally unchallenged, theory of economic regulation interprets government intervention with differentiation between the fortunes of various industries and occupations as the product of altruistic efforts by the legislature to promote the public good.
Need to bind the existence of government policies designed to modify the distribution of income, this approach defines these as the proper function of a distributive branch of government operating through essentially neutral tax-transfer instruments specifically designed to be impartial in their impact across individuals and occupational groups. Free from ‘political pressures’ this approach has been extended in recent years to consider the concept of market failure and other deficiencies of market performance as requiring government intervention.
This ‘efficiency theory’ of regulation has been vigorously criticised, notably in the recent survey by Peltzman (1976). The Great Paper explains the observation that Australian governments have often intervened in markets not to improve their efficiency, but to vary their structure in ways that alter the incomes of particular groups, to the benefit of some and at the expense of others.
Government intervention in agricultural marketing, it is reasoned, is concerned to promote efficiency in the face of this complexity and to replace inefficiency.
The growing size and complexity of the marketing sector makes it important to ensure continued improvement in marketing efficiency; the role of governments is to provide a framework for facilitating such improvements.
Where competition in the marketing system is not effective governments need to consider action to avoid inertia, inefficiency and lack of innovation by marketing institutions.
Similarly, since government policies are concerned with the physical and technical efficiency of the marketing process, it follows that the existence of marketing boards will often help – the adoption of more efficient marketing systems.
Monopsony, described in terms of inequality of bargaining power, makes government intervention in agriculture an important part of its anti-monopoly policy. Since most farmers sell their products to firms much bigger than they are, the objective of government intervention is the elimination of barriers to provide bargaining support to producers where competition is inadequate. Examples include the sugar case, milk and citrus industries.
Packaging and labelling laws are a further product of the search for efficiency – ‘in economic efficiency grounds the arrangements can be defended as advances in the allocation of scarce resources and in adjusting prices to changing patterns of demand’. Legal restrictions on the form of contractual arrangements are justified by the fact that
Governments obviously have an interest in ensuring that producers and consumers are not disadvantaged by vertical integration and that resources are not used wastefully. There is a particular need for a minimum level of protective action for farmers.
Various measures including legislation to prevent various forms of contracts … may be appropriate.
Denial of the option of information, since, where further imperfections exist, it is necessary to have a large amount of information – the Government must have, and must use, more information than the private sector would use.
The marketing sector has been alleged to have provided extensive advisory services. As the Departments of Agriculture are involved, it is basic to the efficient functioning of the market.
The market may fail also in respect of its dynamic functioning.
The Government’s involvement with assistance for farm adjustment is therefore designed to reduce the income problems which arise when help is not provided, or to lessen the inefficiency in the rate of adjustment.
Moreover, because even when the market does not produce a rate of adjustment which is inefficiently slow, there exists no mechanism for modifying such adjustment to ensure that necessary adjustment is not enforced.
Given this emphasis that government as a powerful agency of economic efficiency, it is somewhat disappointing to find that another side of the efficiency rationalisation of government intervention identifies governments themselves as a source of market failure:
Apart from the provision of public goods … a second set of reasons for intervention … concerns the existence of imperfections in the system and includes, in certain circumstances, the consequences of interventions by overseas governments where agriculture is involved.
More important still are the instances where our own government, by virtue of certain unfortunate interventions which have not been productive of efficiency, has fortuitously provided opportunities for efficiency gains to be harvested by further intervention. Thus because ‘all major sources of imperfections result from the actions of government’, the case for government intervention in particular industries is partly a compensatory action for intervention elsewhere in the economy. The major example is provided by the tariff whose effect is to attract resources away from the rural and other export industries … the result is a generally lower level of real (national) income. so that ‘there is a case on economic grounds, a second best course of action, for providing some compensating protection in assistance to the export sector’.
Finally, the distaste for ‘efficiency compensation regulation’ is rationalised by the observation that ‘in practice increases in protection using direct budgetary expenditures would have to compete with conflicting expenditure needs … This may put more emphasis on non-budgetary assistance measures, such as home consumption prices.’
Clearly the efficiency theory of government intervention is capable of versatile application. Nonetheless it is limited by its failure to account for the process whereby the existence of market failure translates itself into the concern for economic efficiency that it presumes motivates government intervention; that is unless the concern arises with the complementary theory of market efficiency which has, at least since Adam Smith, been emphatic that such efficiency arises from the absence of self-interested behaviour (wealth-maximising concerns of private interests and not the outcome of any self-conscious concern for the public good).
An alternative theory
An alternative theory of regulation — which we may for purposes of contrast dub the ‘distributive theory’ — is emerging which imputes this same set of economic arrangements to the interaction of competing groups with different interests in the market place, rather than the pursuit of a social optimum. The theory has been most clearly developed in the United States tariff of 1883, in the work of Stigler (1971) particularly, and the ‘Theory of Economic Regulation’ (1971) and in later contributions by Peltzman (1976) and Becker (1983). The distributive theory takes as its starting point the following two basic issues.
The state has one basic resource which in pure principle is not shared even when the mightiest of its citizens — the power to coerce. The state can seize money by the only method which is permissible in private society, by taxation. The state can also create economic resources through the power to create and control. Precisely because of this coercive power, the state may be able to act in ways which individuals cannot.
This emphasis on the propensity of the state to act for the benefit of groups leads to a different perspective on the nature of government intervention. Rather than being motivated primarily by concern for economic efficiency, government intervention may be better understood as the outcome of a political process in which competing groups seek to use the coercive power of the state to advance their interests.
Forms of intervention
It is the ambitious object of the new theory to account for the size and shape of effective political coalitions and for the direction and form of the transfers they are able to achieve; that is, for the observed characteristics of government intervention.
For the purposes of the present paper — which surveys some of the more important forms of government intervention in Australian agriculture — the chief interest of this approach lies in the attention it focuses on the political balance struck between the interests of the industry receiving the transfer and the interests of the group being taxed to provide it.
If regulation is the outcome of a political process in which groups compete for transfers, then the form of regulation adopted will reflect the relative political strength of these groups. The benefits of regulation will tend to be concentrated among well-organised interests, while the costs are dispersed among a larger and less organised population.
This helps to explain why regulation often persists even when it is inefficient in economic terms. Those who benefit from regulation have strong incentives to maintain it, while those who bear the costs may lack both the information and the organisation required to oppose it effectively.
In the agricultural sector, this process can be observed in the establishment of marketing boards, price supports, and other forms of assistance. These arrangements typically provide benefits to producers by stabilising prices or increasing returns, while the costs are borne by consumers or taxpayers.
The distributive theory also sheds light on the role of government agencies and departments in sustaining regulation. Bureaucracies may have their own institutional interests, including the desire to expand their functions and resources. As a result, they may support regulatory arrangements that enhance their authority, even where these arrangements are not justified on efficiency grounds.
In this framework, appeals to economic efficiency often serve as a justification for policies that are, in reality, driven by political considerations. The language of efficiency can obscure the distributive consequences of regulation, making it more difficult to identify who benefits and who pays.
This perspective suggests that reforming regulatory systems requires more than demonstrating inefficiency. It also requires addressing the political incentives that sustain existing arrangements, including the organisation and influence of interest groups and the role of government institutions in maintaining the status quo.
This perspective is particularly useful in understanding the persistence of agricultural assistance policies. Such policies often survive despite evidence of their inefficiency because they generate concentrated benefits for producers while dispersing costs across consumers and taxpayers.
The distributive theory predicts that industries which are well organised and politically influential are more likely to secure favourable regulatory arrangements. In contrast, groups that are large, diffuse, or poorly organised are less able to resist policies that impose costs upon them.
In the case of agriculture, producers have often been able to organise effectively through industry associations and lobby groups. These organisations play a key role in advocating for policies such as price supports, quotas, and subsidies. By contrast, consumers typically lack comparable organisation and therefore exert less influence over policy outcomes.
The theory also highlights the importance of political institutions in shaping regulatory outcomes. Electoral systems, party structures, and the distribution of political power can all influence which groups are able to secure government support. In some cases, governments may favour particular industries because of their importance in key electoral constituencies.
Furthermore, the interaction between different policies can create complex patterns of assistance and taxation. For example, tariffs designed to protect manufacturing industries may disadvantage agricultural exporters, leading to demands for compensatory measures. This can result in a web of interventions that are difficult to disentangle and reform.
Overall, the distributive theory provides a framework for analysing regulation as a political process rather than a purely economic one. It emphasises the role of interest groups, political incentives, and institutional structures in shaping policy outcomes.
