The Milk Shortage

Once upon a time, there was a government that thought that milk was very important to human dignity. So they decided that milk should be very cheap, and ordered that it be sold for no more than 10 cents per litre. Some people commented that other countries sold it for several times as much, but the state and territory milk boards set their price anyway.

Then one day, the milking machines started to break down. No-one expected it. The Treasurer said it was very unlikely – the kind of thing that only happened every thousand years. No-one knew when the milking machines would be fixed, and there was a lot less milk available than before.

But because milk was still very cheap, people wanted lots of it. So the government decided it would have to set some rules on proper use of milk. To solve the problem, they instituted Stage 1 milk restrictions, under which milk users were banned from using milk to feed to cats. To enforce the rules, they set up a hotline, where people could call to report their neighbours using milk the wrong way.

To the government’s surprise, this didn’t solve the problem. At 10 cents a litre, people still used a lot of milk. Stopping families feeding it to cats didn’t solve the fact that it was still very cheap. And lots of the milking machines were still broken.

So the government instituted Stage 2 milk restrictions, under which people were not allowed to put milk in their coffee. Because some voters loved milky coffee, they created an exception for Sunday afternoon coffee. But if you saw your neighbour drinking a latte on a weekday, you could call a special hotline, and they would be fined.

The government was sure that this would ensure that there was enough milk for anyone, but it turned out that it didn’t help. Some silly people called for the milk price to be increased, but the sensible politicians pointed out that this wouldn’t be right, because milk was a necessity of life, and poor people wouldn’t be able to afford it if it was more expensive. And besides, raising the milk price was politically impossible. The NSW Government knew that if they tried it, the Sydney Horror and the popular broadcaster Alan Laws would hound them from office.

So they introduced Stage 3 milk restrictions, under which households with even street numbers could have milk on their weeties on even days, and households with odd street numbers could have it on odd days. If it was not your day, then the only reasonable use of milk was to feed babies and old people who had lost their teeth. Announcing the plan, the ministers said they were sorry, but everyone had been surprised when the milking machines broke, and fixing them was proving very hard. In the meantime, the people would all have to make sacrifices together. 

There were one or two people who pointed out that perhaps if the country charged more for milk, like other countries did, then there would be more of an incentive to fix the milking machines. But lots of people shouted that this was a very silly idea, because charging more than 10 cents a litre for milk was unAustralian. 

One man came up with a very clever plan that gave everyone their own milk quota, which they could then sell to other people. It would only need a couple of hundred government officials to run it, and he promised it would achieve a result that was very like raising the milk price – without actually raising the milk price. But it was rather too complex for most people to understand.

So they kept on selling milk at 10 cents a litre, and instituted Stage 4 milk restrictions…

This entry was posted in Australian Politics, Environmental Economics. Bookmark the permalink.

22 Responses to The Milk Shortage

  1. Kevin Cox says:

    There are a couple of extra bits to the story.

    Another government official came up with an even better idea. He listened to some economists who told him that the problem would be fixed if only they increased the price. This would reduce the demand so restrictions would not be needed.

    As the government was subsidising the milk they decided it was their money to keep and so anything over ten cents they decided they should keep themselves and not give to the producers of milk so the milking machines did not get fixed because they were subsidising it and they were told it was much more efficient to have one set of milkmen delivering milk and so all milk should be sold through them.

    The government found that they could keep increasing the price until they soon were collecting much more than the subsidy they were paying and their Treasury officials told them they must not hypothecate the funds to fix milking machines because this would be unsound economics as the money should be spent on the most needed other facilities like hospitals to fix the people who had too little milk.

    This proved to be a sound policy as they were able to balance their budget and were applauded as fiscally responsible. As the milking machines kept breaking down so the people were even more willing to pay the higher price and so the government kept on increasing the price because they believed in miracles and knew that sooner or later milk might even fall from the sky and they could collect it for little cost and make even more money.

    They even invented a new name for their surcharge and they called it an abstraction charge and they became famous and hosted many delegates from all around the world who came to see how they did it.

  2. Damien Eldridge says:

    You left out the bit where, despite the scarcity of milk, the country had yoghurt and butter industries which used enourmous quantities of milk. Of course, if the milk price had been allowed to rise, these businesses would have been forced to shut down. Since these products were cheaply available from other countries, this would not have affected consumers very much. But it was considered unfair to force these businesses to shut down. As such, consumers had even less milk available for purchase. But as city folk, consumers were clearly undeserving of such largesse. Everbody knew that only country folk were entitled to assistance. After all, they were the backbone of the economy.

  3. Joshua Gans says:

    Didn’t you also leave out the bit where the government decided to subsidise milk catching containers so that people would make their own breast milk and freeze it. Aren’t you a current beneficiary of that?

  4. Paul Frijters says:

    nice story Andrew. Its clear you can run a long way with the analogy. I’m looking forward to your description of the global milk shortage due to man-made changes of the physics behind milk machines.

  5. Verdurous says:

    An excellent analogy Andrew. Clearly we are tackling water the wrong way and prices should rise. But let me play devil’s advocate.

    Complete absence of government intervention (implied by all so far?) does not seem a sensible approach though. Consider this – humans presently divert over half of all fresh water supplies to their purposes and this figure continues to rise. Markets seem to head towards near complete extraction of a resource before price rises moderate the demand. We can point to seafood, for example Japan’s demand for Sea-urchins which has almost extinguished the particular species in question as an example.

    Now, the question then is, how do we internalise envrionmental harms and the needs of future generations etc. I understand that there is a popular view that markets are excellent at incorporating all information about a resource. Also, as expressed on this blog, and Oikos and elsewhere, there is a prevalent view that markets act as fantastic prediction mechanisms. I think this of often the case but there are large, glaring exceptions.

    Take for example the present stock market positions on resources. It is now clear that continued dominance of the combustion of fossil fues is likely to bring about societal breakdown, the suffering of millions, probable large scale regional conflicts and the extinction of maybe 1/3 to 1/2 of all living species of fauna and flora. The question then is: If this is the case, where is the market reaction to this? Surely given this news, backing renewables and pulling out of conventional energy resources would be a rational/logical result. I can only surmise that the market has not yet incorporated this information.

    Governments don’t seem any better at internalising environmental harms and are price setting does seem a terrible way of looking after our water. But we must take seriously the problem of market failures and develop useful proposals to address these failings before accepting all types of analogies.

    I don’t wish to pick apart the milk/water analogy particularly, but there is one difference that stands out to me. There are few species or ecosystems which are highly dependent on reliable flows of cow’s milk.

    Hey, I still love your work Andrew? See you.

  6. Sinclair Davidson says:

    If everyone is having a go at “the bit you left out”, can I add the government wouldn’t let anyone invest in more cows.

  7. Fred Bastiat says:


    I thought the problem in the analogy was that the milking machines broke down. Would a rational person invest in more cows if there were no machines to milk the cows?

  8. Russell says:

    “One man came up with a very clever plan that gave everyone their own milk quota, which they could then sell to other people.”

    Nah, I prefer the W.A. solution: desal plant no. 1 has been a great success, and so yesterday the Premier instructed the Water Department to bring on desal plant no.2. Water will cost a bit more – so what ? half of Perth is drinking bottled water from God knows where that costs 10 times the government’s water.

    Who wants to think about quotas – we just want to turn on the tap and have the water.

  9. Verdurous says:


    Desal holds promise, but at present, in choosing desal, WA has chosen to vastly increase its CO2 output. Solar desal is being looked at. But, then we still need great care in where we release the hypersaline waste (which can cause great damage to marine ecosystems). Fortunately, there are efforts to combine solar generation, desal and commercial salt production all in one.

    In the end it may be the right choice for some – but now is not the right time to commit to grossly increasing combustive energy production. Even leaving this aside, desal remains a poor choice for places that: lack great wealth; are sited inland; are located at altitude (which is most of the world).

  10. Christian says:

    Also worth adding that:

    One of the reasons that there was a shortage of milk was that body temperature of the cows that made the milk was increasing because of all the pollutants in the air they breath in. But rather than do anything about it, the Federal Government sat around denying that this increase in body temperature was happening, or that if it was happening, it was just part of a natural cycle. When they finally decided to do something (because the science became irrefutable and the public starting getting concerned), it was a very poor and inadequate response. At the same time, some (admittedly now few) supposedly intelligent people argued that the increase in body temperature isn’t happening, and that it is just a vast left wing conspiracy to justify more intervention in the economy.

  11. Sinclair Davidson says:

    Ahh, modern technology. Broken milking machines. As a kid we used to buy our milk from one of the local farmers. In those days a man sitting on a low three-legged stool used to milk the cows by hand (and let the children help him do so).

  12. Claire says:

    ah, but it’s ok, because before long there’ll be an outbreak of foot-and-mouth (or ceptic udder blight because of the lack of regular milking)leading to a massive cull of the herd and the milk machine shortage won’t be a problem any longer.

  13. Sacha Blumen says:

    Very enjoyable, Andrew. Where can I find the current spot price for cow’s milk coupons?

    Russell – maybe people could genetically engineer cows to have much larger udders and produce milk more efficiently. There’s a solution.

    “There are few species or ecosystems which are highly dependent on reliable flows of cow’s milk.”

  14. Russell says:

    “Russell – maybe people could genetically engineer cows to have much larger udders and produce milk more efficiently. There’s a solution.”

    Just how an economist might think, but not the answer. Have a look at your average Holstein milk-producer – it HAS been genetically engineered to have a larger udder and produce more milk. Milk from that kind of cow is to be avoided if possible.

    Sacha you need good fresh (I’m just whispering … unpasteurised) milk from Jersey cow. Illegal, but, umn, obtainable if you really want to find it (you have to say you’re buying it for your cat).

  15. Sacha says:

    Russell – the strategy of saying that I was buying milk for our cat wouldn’t work as she’d know that I’d said that and would demand it before us humans!

    About the story – perhaps the machines broke down as they couldn’t cope with some slightly different factor in the cow’s milk, possibly resulting from an environmental factor the dairy farmers couldn’t control. The thing was, the machines were massive and industrial in scale and unable to be easily renovated as decades ago governments had been sure that these were the ultimate milk machines – no innovations were required.

  16. Verdurous: use renewable energy to power the desalination. Even if the energy cost is doubled, desalination is still affordable (if perhaps dearer than other options).

  17. Russell says:

    “The Premier claimed the new plant, to be completed by 2011, would be powered by 23 megawatts of renewable energy each year but critics said the Government would struggle to find that power by the due date”
    The West Australian, May 16, 2007, Page 1

  18. David says:

    Let’s get back to the real word instead of all the BS.

    Today, the farmers get paid around 35 cents a litre for milk while the consumers are paying more than $5. Work that out.

  19. Andrew Leigh says:

    David, you’re right – there are markups in the milk market. I’m not sure whether they’re higher or lower than in other markets.

  20. Matt Canavan says:

    Where are you buying your milk from David. You’re getting ripped off!

  21. I tripped over this discussion while posting a news article about Swiss dairy farmers. Ah, it is not cheap or easy to drink milk anywhere, it seems. I posted a link but just for information we pay SFr1.80 a litre for our happily protected milk (Swiss cows are considered a tourist attraction and I’m not joking). That comes to about Aus$1.78 a litre, according to the Financial Times. No wonder Australians like beer.

    Here’s the link:

  22. Pingback: A Fat Story « A Blog by Kevin Cox

Comments are closed.