The Department for Environment, Food and Rural Affairs (DEFRA) is facing mounting pressure from the National Farming Union to introduce a strict maximum price cap on synthetic nitrogen fertilisers, a critical input for domestic crop production.
Over the past eighteen months, severe global supply disruptions and a 150% surge in the wholesale price of natural gas—the primary raw material for fertiliser production—have caused domestic fertiliser prices to more than double. This dramatic increase has severely squeezed the profit margins of arable farmers, forcing many to reduce application rates, which agricultural experts warn will lead to significantly lower crop yields and higher food prices next season.
However, industry representatives for chemical and fertiliser manufacturers have strongly warned against any form of price control. They argue that an artificial price ceiling would make domestic production financially unviable, leading to immediate plant shutdowns, severe domestic shortages, and a subsequent reliance on highly volatile and lower-quality international import markets. They suggest that targeted direct subsidies to farmers would be a far more effective and less disruptive way to support the agricultural sector.
With reference to Extract C, discuss the likely microeconomic effects of introducing a maximum price cap on synthetic nitrogen fertilisers on fertiliser manufacturers (producers) and farmers (consumers). Include a supply and demand diagram in your answer.
16 exam-style questions on Edexcel A A Level Economics 1.4.1 Government intervention in markets. Each one has a worked solution and a mark scheme showing where the marks go.