Rick Young, Coffee Czar

Rick Young up at Berkeley is proposing politically correct coffee that should bring us closer to solving the problems of this world. He wants to make it mandatory to sell only organic, fair-trade or shade-grown coffee. However, what we have right now is working just fine, and if it wasn't, what he proposes wouldn’t work, and in fact, would have just the opposite effect.

Young uses the argument that we must pay for the externalities that are caused by overzealous coffee farmers. It doesn’t make any sense, because what he’s proposing to do, subsidize them by giving them money, actually would cause them to become even more zealous than they are (if they were ever zealous in the first place). A normal market mechanism prevents this excess through lowered prices, so that farmers, vigorously doing cost-benefit calculations in their heads, say “ah screw it! I’m gonna grow cocaine. It pays more.” or "ah rayos! mejor cresco cocaina. Paga mejor." The article states, that the market price of coffee is currently at record lows, and from that, we can infer that the supply of coffee will soon decrease. A better measure, if Young really wants to help the environment, would be to tax the coffee, and directly use the money, keeping it independent of the coffee supply, instead of worrying about whether giving that money to farmers causes them to grow even more coffee. It also doesn’t matter whether you tax the consumers or producers, because the shifts in consumer demand or producer supply from either tax would lead to the same result.

But I suspect Young wouldn’t want to tax the farmers.

The thing that Young doesn't realize is that mandatory subsidization to a producer for his product traditionally results in an overproduction of that product along with a corresponding decrease in demand for that product. It’s in any first year economics textbook. In this case, the subsidy would be in the form of the extra dollar (or so) per pound paid to the growers of coffee. One example of such a subsidy is the inflated price for oil that countries pay to OPEC. The natural incentive of a cartel member, the coffee farmer, and the oil rich country, is to take advantage of those inflated prices by overproducing; but the resulting excess would naturally bring prices down, contrary to the cartel's wishes. In order to prevent this, OPEC has to give production quotas to each of its member nations, which I suspect the International Fair Trade Coffee Register would have to do. However, even artifically high oil prices fluctuate depending on conditions – they’re not fixed – and what happens as a result is that, if oil prices decrease, member nations MUST produce more oil in order to take in the same amount of money. This lowers prices more. Needless to say, OPEC is not as effective as it used to be (or cartels in general).

The only justification for Young’s argument is that the extra dollar isn’t actually a subsidy – that it is a fair market price for organically grown coffee. Well, that can make sense. You have a market for normal coffee and a market for organic coffee. Stick a tax on the normal coffee, and watch those farmers instantly convert to organic coffee growers or people to organic coffee drinkers. And they still have a choice as to whether they’re willing or not to pay the extra expense. It’s better than offering them organic coffee or no coffee.

However, that’s examine his justification a little bit more:

“People should pay a price for their coffee that reflects the larger costs, like polluting water and cutting trees,” Mr Young says. “Prices now are artificially low because they don't take into account all the externalities.”

This would make sense if the water the farmers were polluting and the trees they were cutting down were say, government property that was set aside for unregulated usage. A competitive market CAN lead to excess resource exploitation IF the land were public. For example, over-fishing can occur as fishermen try to beat others in catching the most fish to sell, or over logging, or a million other things. But to reiterate, the solution to this would be a tax, instead of a subsidy, and the implementer of this tax should be the government. Not some little guy in Berkeley or another country’s government.

The story suddenly changes when the land becomes private property. The rational farmer, doing his cost-benefit calculations, takes into account the benefit of the trees, as well as the costs of cutting tem down. If the costs outweigh the benefits, he’s either not going to cut them down, or if he does, he’s sure as heck going to make someone else pay for it; he’s going to pass the costs down right to the consumer. If this were the case for coffee, the externalities are already priced in, and we’re already paying for them.