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Market Failures in Agricultural Markets

Article in Pakistan Journal of Life and Social Sciences · January 2024

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https://doi.org/10.57239/PJLSS-2025-23.1.00202

RESEARCH ARTICLE

Market Failures in Agricultural Markets

ARTICLE INFO ABSTRACT

Received: Nov 15, 2024 In this study, the effects of market failures on the agricultural sector are
revealed. Situations where resources are not used effectively and are
Accepted: Jan 1, 2025
distributed inefficiently in free markets are referred to as market failure.
Market failure occurs due to reasons such as monopolistic structures with
high prices and idle capacity, excessive consumption and negative
Keywords
externalities that impose costs on third parties, public goods not provided
Agricultural Markets in the free market, asymmetric information, etc. Market failures are also
frequently encountered in agricultural markets. Agriculture, along with
Asymmetric Information
industry and services, is a very important sector in national economies. In
Externalities recent years, global market instabilities, economic crises, infectious
diseases and climate changes have negatively affected agricultural markets,
Government Interventions
and have also brought about concerns about food supply shortages in
Market Failures agricultural markets due to the increase in the world population. In the
study, market failure factors that occur in agricultural markets have been
determined and examined with a theoretical approach, and government
interventions in preventing failure have been emphasized. Legal
regulations, taxes, agricultural planning, subsidies and inventories aiming
*Corresponding Author: at stabilizing prices can be considered as solutions to prevent agricultural
market failures.
iukav@adiyaman.edu.tr

INTRODUCTION
The first humans made their living by hunting and gathering. Approximately ten thousand years ago,
with the development of human intelligence, they began to dominate nature, to cultivate the land
with the tools and equipment they developed, and to domesticate animals and get benefit from them.
This situation reshaped human life by playing an important role in the initiation and development of
settled life (Mazoyer and Roudart, 2010). Thus, agriculture offered people the opportunity to live
what they believed would be safer lives with access to shelter and food. While agriculture solved the
problems related to people's food needs, it also produced devastating consequences such as diseases,
malnutrition, war, famine, etc. During the industrial revolution (1760-1830), especially in England,
with the adaptation of the steam engine to industry, machine production and the transition to the
factory system had a great impact on important developments taking place in people's daily lives.
These developments were also reflected in agricultural processes, leading to major increases in
agricultural productivity. The use of new agricultural tools and machines and animals, especially in
agricultural activities, was the biggest factor in these production increases. The increase in
production and therefore in productivity led to savings in agricultural labor, triggering migration
from rural areas to urban centers, as well. The workforce needed by the industry at that time was
provided in that way.
Developments in agriculture and industry were examined by Adam Smith and other scientists, and
the foundations of the economy were scientifically revealed, and in this process, the idea of a free
market that balances and regulates itself according to supply and demand became widespread. The
market economy encompasses the goals of efficiency, profit and freedom, which were the goals of the
industrial revolution. The market economy theoretically allows people to make their own choices
and shape their lives.

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In a free market economy, farmers needed to reduce costs and increase their incomes to compete. In
order to achieve this, producers began to apply various industrial techniques, tools and methods in
their fields. These practices led to the birth of industrial agriculture. Today's industrial agriculture is
characterized by genetic engineering, chemical fertilizers, pesticides, expensive machinery, large
plantations of genetically identical organisms, market dominance of concentrated agribusiness and
technology companies, and farmers acting like factory managers (Shahar, 2018). The contribution of
agriculture to the abundant and affordable production of agricultural food needed by individuals is
extremely important. However, this importance has also led to a tendency towards monopolization,
and negative effects on national economies have begun to be seen in terms of standards that must be
adhered to and consumer and environmental health.
In agricultural markets, public goods, positive and negative externalities, common pool resources,
monopolistic power and asymmetric information, etc. can be shown among the factors leading to
market failures. Market failures are when certain aspects of a market make it uncompetitive, thus
making it inefficient and unable to produce socially and mutually beneficial outcomes. The two most
common market failures in this context are the excessive control of market power and negative
externalities such as the harm industrial agriculture causes to consumers and ecological health.
Markets are theoretically environments where consumers seek to maximize their benefits and
besides producers come together to maximize their profits. In markets where perfect competition is
achieved, resource allocation is optimal. In this case, known as Pareto optimum, the assumption that
it is not possible to increase the welfare of one person without decreasing the welfare of another is
assumed to be true. If this does not happen, that is, if Pareto optimum cannot be achieved, market
failure occurs (Öztürk, 2004).
Factors such as the comparative advantage structure of agriculture compared to other sectors, its
multifaceted effects from climate, diseases and pests, its heavy dependence on international trade,
the number of consumers on the demand side, their tastes and incomes, and the cost of technology,
labor and capital can create sources of uncertainty. This situation may cause instability in agricultural
product prices. In such cases, interventions on prices may lead to inefficiency and ineffectiveness in
resource allocation. Market failure may occur as a result of inefficiency and ineffectiveness.
There are factors that lead to market failures in agricultural markets such as public goods, positive
and negative externalities, common pool resources, monopolistic power and asymmetric
information. Market failures occur when certain aspects of a market make it uncompetitive, thus
making it inefficient and unable to produce socially and mutually beneficial outcomes. The two most
common market failures in this context are the excessive control of market power and negative
externalities such as the harm that industrial agriculture causes to consumers and ecological health.
In this study, market failures have been discussed within the framework of economics theory and
their reflections on agricultural markets have been emphasized. It is known that fluctuations in
agricultural product prices, changes in agricultural supply, producers' generally low and variable
income, externalities and the monopsony power of product buyers can lead to market failures in the
sector. The fact that this subject has not been sufficiently addressed in the literature will add value
to the study and is expected to form the basis for further studies.
The aim of the research is to reveal the factors leading to market failures in the agricultural sector. In
the study, firstly, market failure has been explained theoretically and evaluations have been made on
the market failures experienced in agricultural markets in various economies. It is expected that this
study will form the basis for future studies on the subject.
LITERATURE REVIEW
The issue of market failure has become one of the important research topics in many fields. However,
this issue has not been sufficiently researched in agricultural markets. Some of the studies on the
subject in the literature are given below.
A study examining both adverse selection and moral hazard effects on Kansas wheat producers found
that adverse selection and moral hazard problems were insurmountable for private insurers and that
inadequate information used to rate contracts and difficulties in monitoring the activities of
insurance agents led to moral hazard (Goodwin and Smith, 1996).

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UKAV, I. Market Failures in Agricultural Markets

Chalfant et al. (1999), showed that known rating systems are inadequate to solve the classical
adverse selection problem associated with asymmetric information about product quality, thus
causing asymmetric rating errors, that is, a low-quality product may be mistakenly classified as high-
quality. In the study, the effects of asymmetric rating errors on producer returns are shown in the
created model. Accordingly, in the application related to the prune industry, it has been determined
that classification errors reduce the incentives for the production of more valuable, larger plums.
In the study discussing the obstacles faced by private crop insurance markets, it is stated that
contractual issues related to adverse selection and moral hazard may limit the development of
private insurance markets, and that significant systemic risks inherent in crop insurance may make
private insurance costly or even unusable (Goodwin, 2001).
Gramig et al. (2009), found that producers had specific knowledge about preventing or limiting an
infectious disease outbreak in domestic animals, about the preventive biosecurity measures they
adopted on their farms before the outbreak (moral hazard), and about whether their herds were
infected after the outbreak (adverse selection).
In the agricultural sector, high transaction costs arise due to factors such as inadequate access to
information, weak agricultural infrastructure, and credit restrictions, which lead to market failures
(Boulay, 2015).
Dillon and Barrett (2017), examined agricultural factor market failures in five countries in Sub-
Saharan Africa (Ethiopia, Malawi, Niger, Tanzania, and Uganda). The study found strong evidence of
factor market failures in all five countries. It was determined that market failures were not specific
to gender, geography, human capital, or land quality, but were general and structural in nature.
As a result of the increase in red meat prices in Türkiye, the government aimed to ensure food safety
by removing restrictions on red meat imports. However, the continuing increase in meat prices has
shown that public interventions in the sector have not ensured food safety and this has led to market
failure (Sarısoy and Akay, 2018).
The application of unobservable chemical insecticides by maize producers to the product they intend
to sell, but not to the maize they intend to consume, is a potentially important and under-recognized
adverse selection problem in informal food markets in developing countries. In this context, there is
a lack of enforceable quality standards, third-party approval, and insufficient price premiums that
would encourage vendors to invest in practices that improve quality and reduce risks to consumers
(Kadjo et al., 2020).
Goodhue (2000), points out that when there is an adverse selection problem, the buyer can reduce
information rents by controlling the non-labor inputs used in the restrictive case of the Cobb-Douglas
production function. Here there is a comparation that two traditional cases of perfect information
and “pure” asymmetric information, where the farmer has zero information about the use of non-
labor inputs unless the buyer controls the input.
In the study examining whether the lack of information between producers and consumers in the
drinking milk market leads to asymmetric pricing, the long-term relationship between producer and
consumer price series has been analyzed using co-integration analysis, and the short-term
relationship has been analyzed using the error correction model. According to the analysis results, it
was determined that price series move together in the long term and the permeability of producer
milk prices and retail milk prices in the milk supply chain is asymmetric (Taylan and Önder, 2021).
Within the scope of support provided to small-scale farmers, the concepts of adverse selection, moral
hazard and opportunistic behavior of farmers have been extensively examined and discussed, and
then studies on the subject have been presented through a systematic literature review. The study it
has been determined that the relevant units (service providers, farmers and government officials)
involved in the process of providing support to small-scale farmers acted in a way that took
advantage of the gaps in the system. It has been suggested that efforts should be made to minimize
self-interested behavior in order to reduce transaction costs and increase the effectiveness of the
support provided (Zantsi et al., 2021).
Rodríguez (2023), identified widespread market failures in his study analyzing the Colombian coffee
production market. These are the existence of land sizes that lead to labour inefficiency, mismatches

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between labour and capital demands and coffee farm household characteristics, and the dependence
of efficiency in single factor allocation on choices of other factor levels and markets.
THEORETICAL AND CONCEPTUAL FRAMEWORK
In this section, the theoretical foundations of market failure are emphasized and the related concepts
are explained.
In classical economics theory, it is stated that the economy will be in balance through the price
mechanism and this will be achieved through the invisible hand. The invisible hand is Adam Smith's
famous metaphor for the unseen market forces that lead to society's best interests when everyone
acts in their own self-interest in a competitive, free market economy. Smith's invisible hand concept
states that the most equitable outcomes for society can occur when each individual acts according to
his or her own economic interests. The self-interest that Smith speaks of (narrowly conceived as the
profit motive) does not represent the broader interests that he considers to improve one’s situation
(Smith, 2009). Smith, in particular, thinks that self-interest includes respect for others, which he calls
moral sentiments. A market driven by moral sentiment as well as economic self-interest produces
outcomes that are not only efficient but also fair. Therefore, justice, which is a very important aspect
of markets, is the main pillar that keeps the whole structure standing. When deviations from this
understanding occur for various reasons, the environment is prepared for market failure.
Market failure occurs when the marginal social costs for a particular good or service do not equal the
marginal social benefits. That is, market failure occurs when market prices do not equal marginal
social costs (Dollery and Wallis, 2001). In order to achieve Pareto optimum, which indicates
economic efficiency, while ensuring the optimal distribution of produced goods among consumers
(efficiency in consumption), it is also necessary to ensure the optimal distribution of various goods
of production factors in the production area (efficiency in production) (Dinler, 2005).
According to traditional economics theory, the factors that lead to market failure are imperfect
competition, external economies, economies of scale and natural monopolies, and public goods. In
addition, asymmetric information and transaction costs also cause market failures (Aktan, 2016;
Aktan and Yay, 2019).
The main factor that leads to market failure is imperfect competition. Today, perfect competition
markets are rarely encountered (some agricultural products and stock markets), and the vast
majority of markets are malfunctioning markets. Theoretically, perfect competition markets are a
market model where there are many buyers and sellers, entry and exit to the market are free,
homogeneous goods are available, and buyers and sellers have full information.
External economies are one of the factors that lead to market failures. External economies are defined
as the benefits or costs incurred by another economic unit as a result of the production or
consumption activity of an economic unit. External economies can be both positive and negative.
Positive and negative external economies (external benefits and costs) can prevent the market
economy from functioning at an optimal level.
Economies of scale (natural monopoly) are another factor that causes market failures. The main
reasons for the failure of economies of scale in the markets are the large volume and high technology
level required for this production activity. Economies of scale are known as markets where costs
decrease as production levels increase. Therefore, as the scale increases, the return also increases.
According to traditional economics theory, markets fail when one or a group of firms dominate the
entire market or when natural monopolies emerge as a result of economies of scale (Tepe and
Ardıyok, 2004).
The existence of a single firm in economies of scale may cause injustice in the market for the company
can make excessive profits by setting the production level at a low level and selling at a high price.
Since the price will be set above the marginal cost of production, theoretically total social welfare will
remain below the maximum attainable level. Therefore, traditional economists argue that such
natural monopolies represent market failure and that this requires government intervention to
regulate prices and the level of output in such a sector where the price will be closer to the marginal
costs of production (Aktan and Karaaslan, 2009).

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Another factor that causes market failures is public goods. Public goods are goods that are consumed
without any cost to others and that are not prevented from being consumed by any individual. In this
context, education and health services can be given as examples of semi-public goods (Aktan, 2019).
Asymmetric information also causes market failures. Akerlof (1970), described the way in which
asymmetric information between buyers and sellers distorts the efficiency of markets. Although the
seller knows the real value of his goods, the buyer does not have complete information about the
quality and price of the goods. This phenomenon, referred to as information asymmetry, is the
inability of one party to fully know what the other party knows. This can disrupt the efficiency of
markets. Asymmetric information is when one economic agent in the market has more information
than the other. Asymmetric information, which is described as a market failure, refers to the fact that
buyers and sellers have different information about goods and services. In this case, information
symmetry is disrupted and asymmetric information, known as market failure, occurs and is moving
the market away from balance. In the study analyzing the price structure of the American beef market
using weekly beef producer, wholesale and retail prices, price asymmetry was identified between
wholesale and retail prices (Goodwin and Holt, 1999).
There are two main problems regarding asymmetric information problems. These are hidden
information and hidden action. Hidden information or adverse selection is characterized by a
situation in which the agent has some private information about costs that are unknown to the
principal. Hidden action, also called moral hazard, is explained as a situation where the agent can
take an action that cannot be observed by the principal and affects his benefit (Viaggi et al., 2020).
Transaction costs, which include the cost of ensuring social order and the fulfillment of contracts
within the economic system, are another factor that leads to market failures. Transaction costs arise
as search and information costs, bargaining costs, and monitoring and enforcement costs. Therefore,
increasing transaction costs leads to market failure.
MARKET FAILURE IN THE AGRICULTURAL SECTOR
Agriculture is an economic activity carried out to produce plant and animal products using
production factors and to obtain value-added products from these products. After the hunting and
gathering phase, agriculture played an important role in the transition to settled life. It became a
sector that had a say in the fate of humanity for approximately ten thousand years until the industrial
revolution (Mazoyer and Roudart, 2010).
Factors such as the comparative advantage structure of agriculture compared to other sectors, its
multifaceted impact from climate, diseases and pests, its heavy dependence on international trade,
the number of consumers on the demand side, their tastes and incomes, and the cost of technology,
labor and capital can create sources of uncertainty. This situation may cause instability in agricultural
product prices. In such cases, interventions on prices may lead to inefficiency and ineffectiveness in
resource allocation. The emergence of inefficiency and inefficiency will cause market failure.
In many countries, access to accurate and reliable information about agricultural markets, climate
conditions and basic research is provided through public means, and this is largely financed by
governments. Of course, although producers and firms bear the cost of these inputs, much of the final
or economic impact is passed on to consumers. The additional production costs that arise are
transferred to product prices at higher rates (Freebairn, 2010).
Agriculture is seen all over the world as a strategically important sector that cannot be left to market
economy conditions and therefore requires government intervention. The agricultural sector, which
stands out with factors such as the nutrition of the country's population, food security and safety,
transferring resources to industry and income distribution, is supported by the government by
allocating large amounts of resources when necessary.
The seasonal nature of agricultural activities and their dependence on climate by nature cause
irregularities in product prices, resulting in fluctuations in producer incomes, which makes it difficult
for producers to achieve a balanced and adequate standard of living. In this respect, governments are
faced with the responsibility of reducing the instability in agricultural product prices and improving
low agricultural incomes within the scope of supportive activities and policies. Agriculture also
contributes to the development process as countries industrialize. With industrialization, the share

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of agriculture in national income decreases, but agriculture continues to maintain its strategic
importance due to its relations with the sectors it contributes to. The connections between
agriculture and the market economy manifest themselves in different ways, such as meeting people's
need for food products, ensuring the flow of savings to industry, expanding the markets for industrial
products, obtaining foreign exchange from exports to purchase imported inputs, and producing
agricultural inputs to be processed in industry. In addition, with the migration of labor from
agriculture, where there is hidden unemployment, to industry, a cheap labor source becomes
available for industry. This situation meets the need for productivity, which is an important problem
of development, by ensuring that labor with low productivity in agriculture works effectively and
efficiently in the industrial sector (Tokatlıoğlu et al., 2018).
Some practices that qualify as market failures in agriculture are: The first is the problem of
incomplete information/asymmetric information. The information provided by the government
regarding the agricultural sector can be considered as a public good. It is possible for the knowledge
that a producer in agriculture acquires and starts to use, to be used by his neighbors in a society that
lives within traditional patterns. This positive externality is used to ensure the efficiency of the
support provided to producers, especially in the adoption of new technologies. Secondly, irrigation
services in agricultural activities are of a public nature. In some countries, the government allocates
resources to irrigation projects and provides this service to producers. Imperfecft competition
market conditions in agricultural insurance and credit areas are also among the reasons leading to
market failure. In developing countries, agricultural workers are not fully insured against the
production and price risks they face. Rural credit markets, like agricultural insurance markets, are
markets where imperfect competition conditions apply (Gönel, 2010). All these factors show why
state intervention in agriculture is necessary.
While there is a competitive market in the agricultural products market due to the large number of
producers, the fact that input markets exhibit imperfect competition (monopoly or oligopoly) has
become a problem on a global scale. This situation may lead to the agricultural sector becoming
unprofitable and the production amount decreasing, thus increasing the product prices. Some of the
goods and services needed by consumers are supplied by the government and some by the private
sector. The government can enter the market and produce some goods and services due to their
technical features. In this context, the production of goods that are compulsory for the society by
monopolies, the possibility of production with decreasing costs and zero marginal cost, joint
consumption features, under- or over-production of goods and services that create positive or
negative externalities by the market can cause market failures (Şener, 1998).
RESULTS AND DISCUSSION
In the study, failure examples in agricultural markets such as public goods, asymmetric information,
externalities, etc. have been identified and evaluations have been made regarding them.
Although food and agricultural production have economic as well as social importance, various
disruptions in the sector are noteworthy. Problems such as productivity, efficiency, marketing and
organization in the sector cause negative effects for consumers as well as producers. This situation
puts the sector in a risky situation in developing countries and makes it more vulnerable to external
shocks (Demez and Ökde, 2023).
Adverse selection due to incomplete information on product quality is a concern in many agricultural
commodity markets. Ranking is one way to alleviate the adverse selection problem. However, the
rating may often contain errors. Possible premiums and price discounts related to product quality
may encourage market participants to classify quality attributes. Many sizing methods can have an
inherent adverse selection bias due to grading error, which can have a deterrent effect on the
production of high-quality product. Errors in classifying products may lead to adverse selection.
From here it can be said that low quality goods can push high quality goods out of the market. That
is, adverse selection can occur without resorting to asymmetric information and heterogeneity
(Chalfant et al., 1999).
Adverse selection problems can occur in agricultural crop insurance. Insurance rates may not
accurately reflect the true probability of loss for farmers. High-risk producers may pay lower
premiums than they should, while low-risk individuals may pay higher premiums. Insurance

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premiums may provide an advantage for high-risk producers, while being disadvantageous for low-
risk producers, resulting in a risky premium pool. This is an example of adverse selection (Goodwin,
2001). In addition, the insurance of buildings and machinery, which is one of the risk management
strategies, leads to information asymmetry and market failure problems in the economy. However,
greater problems are encountered when it comes to insurance against climate factors and yield
changes. Ultimately, this situation can create moral hazard and adverse selection problems, leading
to market failure (Freebairn, 2010).
In the context of food safety, threats such as pesticide residues and aflatoxin contamination in staple
foods can often go unnoticed by both buyers and sellers. However, producers have more information
about food quality than consumers. Such information asymmetries can hinder market development
and harm human health. For example, if consumers cannot monitor pesticide residues themselves,
cannot easily test for residues, and cannot obtain reliable information on grain quality from a third
party, price adjustments based on quality are unlikely because buyers cannot easily distinguish
between quality and poor quality grain (Kadjo et al., 2020). Lack of information leading to market
failure makes it difficult for producers to know what products are needed in what quantity, when, in
what quality and at what price to supply the market. Consumers also need similar information.
Asymmetric information arises from producers' decisions to adopt practices that may alter
unobservable corn quality, such as applying chemical pesticides to corn that protect corn from insect
attacks but may pose adverse health risks when consumed by humans. There is also a high
probability that producers have incomplete knowledge about the health risks associated with
applying chemical pesticides to corn (Kadjo et al., 2020).
In general, sellers' subjective beliefs about unobservable quality attributes may create more than
adverse selection in informal markets. Adverse selection discourages market participation and can
lead to significant health risks for consumers. In addition, inadequate information on food safety and
proper storage practices leads small-scale farmers to use poor quality grains from markets or stocks,
and this results in creating risks and causing negativities in informal markets (Kadjo et al., 2020). In
addition to focusing on increasing production volumes in eliminating these disruptions, improving
product and service quality is also important.
Asymmetric information is often the case when planning agricultural environmental contracts. The
opportunity costs associated with alternative practices in the agricultural sector depend on variables
that the producer is aware of, but that the regulatory establishment is not easily aware of (Canton et
al., 2009).
There are many reasons why producers prefer input control under contract farming, some of which
involve asymmetric information (Goodhue 2000). Some examples of asymmetric information may
occur in a buyer-producer relationship involving multiple inputs. For example, the buyer is less
informed about the nature of the production function than the producer. When information is
asymmetric in this sense, it may be costly for the buyer to determine the input mix. The farmer may
choose a combination that he can improve on. Moral hazard may be an issue if the farmer's effort
cannot be observed in terms of its effects on quantity or quality of the product and the effect depends
on the use of other inputs (Sexton, 2013). In economics, moral hazard occurs when a person takes
more risks than others and bears the costs of the risks. Moral hazard can occur when one party's
actions may change to the detriment of the other party after a financial transaction has occurred. The
concepts of moral hazard and adverse selection are often used interchangeably, but they are not
strictly synonymous. On the one hand, adverse selection occurs when there is a lack of symmetric
information between buyer and seller prior to a deal. Moral hazard occurs when there is asymmetric
information between two parties and a change in the behavior of one of the parties occurs after an
agreement is made. Both expressions are used to describe situations where one party is at a
disadvantage compared to the other (Mkhabela, 2018). It is assumed that moral hazard can be
prevented by a combination of incentives and restrictions. Monetary incentives such as profit,
dividend and bonus payments for meeting and exceeding quality and quantity requirements
minimize the risk of moral hazard. The restrictive factors identified as having a negative impact on
moral hazard include environmental control of production and the control and implementation of
general good agricultural practices (Mkhabela, 2018).

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Other motivations for providing inputs, depending on the farmer's characteristics, include easing the
farmer's credit constraint, if any, liquidity constraint, or redistributing risk if he is risk averse. Quality
issues are also important, including but not limited to those involving asymmetric information
(Goodhue and Simon, 2016).
Through various mechanisms for monitoring contracts, adverse selection and moral hazard costs can
be reduced both pre- and post-contract. In order to reduce the costs resulting from the emergence of
moral hazard, either one of the parties must bear the costs, or social pressures, incentives or group
contract incentives must be put in place (Ncube, 2020).
With agricultural contracts, it is ensured that the preferred products are grown and produced in
appropriate and agreed places and times. In addition, it is important to have incentives for the
coordination of the relevant parties and to provide these incentives at the lowest possible costs. To
achieve this, contracts must be designed to overcome market failures and distribute risk and control
differently among contract participants (Ncube, 2020). The adoption of monetary reforms in a period
of increasing market failures was associated with the rapid increase in the use of agricultural
contracts in Africa in the 1980s, with the result of that, economic liberalization and institutional
reforms reduced government interventions in service delivery (Ncube, 2020).
GOVERNMENT INTERVENTIONS IN PREVENTING FAILURE IN AGRICULTURAL
MARKETS
Agriculture is seen all over the world as a strategically important sector that cannot be left to market
economy conditions and therefore requires government intervention. The agricultural sector, which
stands out with factors such as the nutrition of the country's population, food security and safety,
transferring resources to industry and income distribution, is supported by the government by
allocating large amounts of resources when necessary.
Government intervention may occur as a result of the price mechanism, which forms the basis of the
functioning of the market mechanism in classical economics, losing its functionality and therefore
failing to play an effective role in resource allocation (Wallis and Dollery, 1999). This situation is
observed more clearly in the agricultural sector. The impact of climate conditions on agriculture
creates risks and uncertainties in the sector. In addition, the low supply and demand flexibility of
agriculture, the difference in the production process compared to other sectors, and more
importantly, market failures in agricultural markets make interventions in agriculture necessary.
In general, governments can intervene in the agricultural sector by providing public services such as
the provision of information and transportation infrastructure, the legal enforcement of contracts in
the sector, and agricultural research, and by making indirect regulations on quantities and prices. In
addition, many countries directly intervene in the agricultural sector by establishing official
marketing systems. Taban ve tavan fiyat, price and quantity controls, direct interventions in markets,
imposition of non-tariff barriers and other public interventions are among the state interventions
that are frequently seen in agricultural markets (Comcec, 2017; Lundberg, 2005; Andreosso-
O’Collaghan, 2003).
Public authorities can use intervention in agriculture as a policy tool to influence and change the
economic and social structure around the world. For this purpose, increasing efficiency by ensuring
coordination in the sector, affecting the distribution of agricultural income and ensuring food
security are also indicators of government interventions in agriculture (Lundberg, 2005). In this
context, the reasons for government intervention in the agricultural sector can be shown as
disruptions in credit and insurance markets, public goods and increasing returns, incomplete
information, externalities and disorders in income distribution (Stiglitz 1987).
Therefore, governments intervene in the agricultural sector in order to ensure food security, to be
self-sufficient in food products, to reduce rural poverty, to ensure stability in agricultural product
prices, to increase competition in the sector, to realize agricultural industry, to encourage rural
development, to increase the participation of the private sector, in short, to reduce the impact of
market failures (Standing Committee for Economic and Commercial Cooperation of the Organization
of Islamic Cooperation [Comcec] 2017). However, in interventions to correct market failures,
ensuring alignment between the public and private sectors may incur additional costs. These
interventions may lead to social costs and reduce economic efficiency. The adoption of monetary

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reforms in a period of increasing market failures was associated with the rapid increase in CF
(Contract Farming) implementation in Africa in the 1980s, and consequently, economic liberalization
and institutional reforms reduced government interventions in service delivery (Ncube, 2020).
The differences in economic policies implemented by countries also differentiate the market failures
that countries face, and this also affects the government policies to be implemented against failures
(Sağdıç and Çakmak, 2021). Therefore, each country must first determine the causes of market failure
and then develop policies to reduce the impact of this failure (Stiglitz, 1987). The economic policy to
be implemented should consist of goals/targets based on a specific logical justification and the tools
developed or designed to achieve these goals/targets. In this context, agricultural policies can be
examined in two categories (AndreossoO’Collaghan, 2003). In the first stage, there are agricultural
support policies that include policies affecting agricultural prices. The support given to producers
and consumers is rearranged every year. The regulation of structural policies is in the second
category. Such policies, which aim to influence the structure of the agricultural sector and the actors
in this sector, cover a long-term period.
In short, externalities and other similar market failures can be overcome by ensuring that cost-
effective measures and practices are taken, such as understanding major changes in natural
resources, valuing marginal changes in the provision and use of environmental assets and ecosystem
services and including them in economic decisions, and investing in infrastructure and
environmental R&D to minimize market failures (Taş and Kütükçü, 2022).
CONCLUSION
This article has discussed the impact of market failure on the agricultural sector. Factors that lead to
market failure are imperfect competition, external economies, economies of scale, natural
monopolies and public goods. In addition, asymmetric information and transaction costs also cause
market failures.
Market failure occurs in free market economies when resources are allocated to inefficient areas, and
market failures are observed as a result of the existence of monopolistic structures, negative
externalities, lack of information, public goods, etc. One of the sectors where market failure is seen is
agriculture.
In recent years, climate changes in the world, fluctuations in oil prices, ineffective and inefficient use
of resources, instabilities in imported input prices due to changes in exchange rates, especially in
developing countries, and supply-demand imbalances due to epidemics have created significant
fluctuations in the prices of agricultural products.
In agricultural markets, in addition to factors such as public goods, externalities, monopolistic
behavior and information asymmetry; allocation of land and water resources between agriculture
and the environment, natural monopoly characteristics of agricultural infrastructure, information
asymmetry between buyers and sellers regarding food quality and safety, externalities related to
external costs of soil, air and water pollution arising in the agriculture-based food industry have also
been determined to lead to market failures.
The differences in information that producers and consumers have about the characteristics of
products and inputs can cause market failure in terms of creating a balanced market. This can lead
to productivity losses. Areas where asymmetric information has the potential to cause market failure
in the agricultural sector are food quality and safety and insurance.
In order to reduce the problems that information asymmetry may create, companies protect their
reputation, provide assurances, facilitate product returns and use qualified brand names, while
governments ensure that processing techniques and other production activities are regulated,
labeling is mandatory, standards and "quality" levels are implemented and lawsuits against sellers
are low-cost to protect consumer rights.
Policy interventions such as customs duties, quotas, fertilizers, fuels, export subsidies, etc. can distort
the efficiency of resource allocations and cause market failure in the sector. Therefore, instead of
directing growth through subsidized agricultural input and output prices, governments should focus
on productivity increases in the sector.

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Countries should first identify the factors that lead to failure and develop appropriate intervention
policies against market failures that they may encounter. The policies to be implemented should be
directed towards improving market efficiency and correcting market failures such as reducing
poverty. It is expected that the results of this study will be useful for the parties in the agricultural
sector, farmers, investors, managers and policy makers.
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