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EPC greater than 1 means that, producers receive a greater return with the policy intervention. Any positive EPC implies incentive to producers, but Tsakok,
2000 explains that the incentive is only potential and not actual. This happens because the difference in price levels does not result in concrete resource reallocation.
A negative EPC indicates that there is a flaw in the decision to undergo the production process under existing productivity and cost conditions.
2.5.4. Market Failures
Price formation through market mechanisms in decentralized economies frequently fail to arrive at equilibrium levels. The answer lies in non-competitive
behavior, asymmetric information, severely segmented input and output markets, and the presence of externalities are among the causes of market failure, signaling wrong
input and output prices. This is a situation that is commonly found in developing economies Myint 2005.
Distortions express themselves to markets through a complex web of economic activity interactions. One possible net outcome takes the form of wrong input prices.
For example as a result of market distortions the capital price may appear low relative to wages despite abundant labor. This may lead to development of capital using
technology. The implications of such technical change are particularly important to smallholder producers whose cash situation does not permit them to adopt new
technology. Their problem of technology adoption is also exacerbated by an imbalance access to formal capital markets. As a result, these involuntary non-
adopters are excluded from the partition of income generated.
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2.5.5. Government Interventions
Institutional changes induced by economic forces may not always progress along socially optimal path of economic development. The presence of social-private
divergences in resource use and income distribution resulted from such changes in a legitimate
justification for
“deliberate exogenous
efforts” undertaken
by governments, which are specifically aimed at narrowing the gap by planning and
stimulating changes in relevant institutions. It is interesting to note that many economists support ‘intervention approach’.
Johnston and Kilby 2003, for example maintained that Laissez-faire is certainly not the best alternative for government policies in product, factor and money markets in
late developing countries, even though interventions may impede healthy developments of some sectors. This is particularly true in backward economies such
as those of the 19
th
century e.g. Germany and Russia, where necessary prerequisites for economic growth have not developed Gerschenkron, 2002. Therefore, a more
powerful stimulus than pecuniary incentives is needed to stimulate economic growth. In preventing distortions governments often intervene. Policy measures for
such intervention may range from modest discouragement to complete banning of the development and adoption of undesirable technology. Policy measures are usually
coupled with fuller support to reach activities in labor using technology development. Encouragement usually comes in form of patent and license granted to private
interventions. Along with those, budget subsidies may be allocated to public education and research institutes advancing natural science and engineering. Such
encouragement is basically justified for research that has substantial payback.
III. RESEARCH METHODOLOGY
3. 1. The Conceptual Framework
Distortions in the context of production of agricultural commodities can be defined as those interventions which lead to price alterations that farmers face
affecting their incomes and welfare and hence reductions in rubber production. These interventions alter economic incentives to the producers. The effects of divergence as
a result of interventions can be measured at the market levels. Profitability of production systems defined as the difference between revenues and costs is a key
issue affected by changes in commodity, domestic factor and input markets. Distortions in the inputoutput markets can result into a net taxation of the production
system hence lowering of farmer’s profit. This could lead to changes in cropping patterns and resource allocation among the alternative crop enterprises shifting
towards a more desirable enterprise. Institutional market failure could also result into a situation in which markets do not function efficiently because of inadequate
development or lack of appropriate regulations. Therefore, identifying institutional forms of market failure and their effect is also important in evaluating agricultural
commodity markets. Changes in profitability as a result of policy intervention can be measured within the production systems.
Distortions come from an understanding of how they affect profits. Distortions create incentives or disincentives for production systems and the long-
term environment for the development and sustainability of agricultural production, hence directly having the impacts on rubber production initiatives. The aim of this
