THE IMPACT OF GOVERNMENT INTERVENTION ON AGRICULTURAL INDUSTRY: A CASE STUDY IN THE ISRAELI RAW MILK INDUSTRY

This research studies the effect of government intervention on the Israeli raw milk industry by examining the relationship between the producers’ costs and the price of milk. Like in many other countries, the government is actively involved in the Israeli agricultural market, including the raw milk production industry. The goal of government intervention is to ensure regular production and supply of basic, necessary milk products. Intervention manifests through the setting of production quotas and the price that the dairy farmers receive when selling their milk. According to accepted economic theory, the price that the government is supposed to set is the same one that would arise through a competitive market. The purpose of this research is to study the relationship between the price and marginal cost over two periods. The first period is from the years 1974 through 1994 and the second period is from 2010 through 2012. In the time between these two periods a fundamental change to the industry occurred in terms of the way the government interacted with the farmers. It will be interesting to see if the government policy change has an effect on the relationship between the price of milk and the marginal cost of the dairy farmers. The results of this study show that the price of milk is higher than the marginal cost, but the markup in both periods (1974 to 1994 and 2010 to 2012) is not particularly high.