Transfer efficiency of agricultural price support policies

1. Transfer efficiency of agricultural price support policies Economics of Food Markets Lecture 15 Alan Matthews

2. Lecture objectives • To discuss the concept of transfer efficiency as the relationship between benefit and economic cost of a transfer policy • To show the possibility of ranking market interventions in terms of their transfer efficiency.

3. Measurement of transfers Example of import tariff Transfer to producers = A+B Transfer to taxpayers = C Transfer from consumers = -(A+B+C) Net transfers = 0

4. Distinguishing transfers and income effects • Transfers are the amount of money passing from one group to another. By definition, net transfers sum to zero. • Example is the OECD Producer and Consumer Support Estimates • Income effects are measured by producer and consumer surplus and government revenue changes in welfare analysis • Income effects always smaller than size of the transfers, due to economic costs due to the transfer

5. Economic costs • Definition of economic costs • sum of real income effects; may be divided into distortionary costs and transactions costs • Direct and indirect economic costs • direct costs of a support instrument are the distortionary costs and transactions costs directly associated with it. • Indirect costs include costs of raising government revenue and rent-seeking costs

6. Summary of economic cost concepts

7. Distributive leakages • Even if economic resources are not wasted, inefficiencies can arise if some of the transfer leaks away to other beneficiaries • Most benefits go to higher income farmers who may not need support • Captured by upstream or downstream suppliers or processors, including capitalisation in land or quota values • [Terms of trade effects, resulting in leakage of benefits to third countries]

8. Measuring transfer efficiency • Transfer efficiency analysis is concerned with the magnitude of the transfer losses associated with agricultural support instruments. • Incorporates economic costs and distributive leakages (i.e. gains to unintended beneficiaries) • Goal is to rank instruments in terms of their transfer efficiency • Conceptualised in Transfer Efficiency Curve (also called Surplus Transformation Curve)

9. Transfer efficiency and the unit cost of making a transfer • Transfer efficiency • Write deadweight cost in this way • Divide and multiply RHS by first term above • Divide across by Change in PS

10. The transfer efficiency curve 45 degree line Transfer efficiency curve

11. Ranking of alternative policies according to estimated transfer efficiency Source: OECD

12. The incidence of deficiency payments Benefit to farmers Source: OECD. Note that the precise numbers depend on assumptions regarding elasticities and shares of farm household labour and land in total labour and land

13. The incidence of market price support Source: OECD. Note that the precise numbers depend on assumptions regarding elasticities and shares of farm household labour and land in total labour and land

14. The incidence of area payments Source: OECD. Note that the precise numbers depend on assumptions regarding elasticities and shares of farm household labour and land in total labour and land

15. The incidence of an input subsidy Source: OECD. Note that the precise numbers depend on assumptions regarding elasticities and shares of farm household labour and land in total labour and land

16. Issues in measuring costs and transfer efficiency of agricultural support policies (1) • Whether transactions costs and indirect costs included (and distributive leakages for transfer efficiency analysis) • Costs only defined in comparison to some counterfactual, i.e. alternative instruments to achieve redistributional objectives • Method assumes absence of externalities and no spillover effects to other distorted markets

17. Issues in measuring costs and transfer efficiency of agricultural support policies (2) • The time horizon • macroeconomic considerations and the level of unemployment • stability issues ignored in a comparative statics framework • a technical issue - limitations of the consumer surplus approach to measuring changes in consumer welfare

18. Reading • Commission European Economy chapter • Lecky 338.1094N42 • OECD 2001 report (skim)