Efficient income redistribution for a small country using optimal combined instruments

In this paper I improve Gardner's surplus transformation curve framework by assuming that governments are able to vary many policy instruments simultaneously instead of only one. I use my framework to find the combination of the currently used instruments which provides the most efficient income redistribution for the Austrian bread grains market. Comparing the most efficient policy with the actual policy reveals that 464 × 10⁶ Austrian shillings were wasted. I theoretically compare for a small country the transfer efficiency of every possible pair of the four major agricultural policy instruments: floor price, (production) quota, co-responsibility levy, and deficiency payments. Without considering the marginal cost of public funds (MCF), deficiency payments cum quota (equal to a fully decoupled direct income support) is the most efficient policy, succeeded by floor price cum quota, and floor price cum deficiency payments. If the MCF is taken into account, the ranking crucially depends on the market parameters, the transfer level, and the value of the MCF. For the Austrian bread grains market, I empirically demonstrate that given the present support level, a fully decoupled direct income support redistributes income most efficiently as long as the MCF is lower than 1.17. Beyond this value a floor price cum quota policy becomes more efficient. A floor price cum deficiency payments policy is never superior to the floor price cum quota.     

Abolition of Raw Milk Quota in the European Union: A CGE Analysis at the Member Country Level

This paper discusses a generic approach to implementing production quotas in an applied general equilibrium framework. The quota rent is interpreted as additional primary factor payments. We analyse the abolition of the raw milk quota and the elimination of export subsidies for dairy products in the European Union at a member country level. The raw milk output increases in Denmark, Ireland, Italy, Luxembourg, the Netherlands and Spain, while it declines in Germany, Greece, Portugal and Sweden. The EU‐wide effect for raw milk production is an output increase of 3% and a price decline of 22%. To assess the robustness of the critical assumption about the raw milk quota rent we apply Arndt and Pearson's Systematic Sensitivity Analysis.     

Corporate Strategy in the Tobacco Manufacturing Industry: The Case of Philip Morris

The purpose of this case study is to identify corporate strategy options at Philip Morris in an uncertain business and legal environment. Because it controls approximately one-half of the domestic market for tobacco products, efforts by antismoking advocates directed toward getting Philip Morris to change its corporate policies are a major step toward getting policy changes accomplished within the entire tobacco manufacturing industry. The company has been the largest player in a structurally oligopolistic industry with only a small number of important competitors. In October 1999, on a web site position paper, Philip Morris admitted that smoking is a contributing factor to the development of a variety of diseases and that cigarette smoking was addictive. The paper examines legal issues pertaining to lawsuits directed toward claims on behalf of smokers and their families. A jury verdict in the Florida class action lawsuit on behalf of smokers, now under appeal, would require payments approximately equal to the entire market capitalization of Philip Morris on the day the verdict was announced. The paper outlines three possible organizational strategies in the face of continuing legal issues which threaten the future of the company: (1) Continue as they are now operating as a single company; (2) Spin off nontobacco components to shareholders as a separate company; and (3) Discontinue domestic manufacture and sale of tobacco products while maintaining an international tobacco business.     

Output and input bias effects of U.S. direct payments

This study examines the national effect of U.S. direct payments on the extent and direction of biased technical change on U.S. agriculture. We also assess the economic significance of the estimated bias effects for economic policy modeling endeavors involving a reduction of domestic support payments. A two outputs (livestock and crops) and four inputs (labor, capital, land, and material) translog cost function was estimated from national time series (1948–2011) data. Results indicate that payments do not induce output‐biased technical change. We do find evidence of Hicksian bias that is land using and material input saving attributable to support payments. Global computable general equilibrium simulations suggest that price and output effects of discontinuing direct payments are 1/4 to 1/3 the size once the bias effects are incorporated.     

The impact of decoupled payments on U.S. cropland values

An extensive literature has shown that various farm programs may influence the value of farmland, but other studies have not examined the cropland price effects of direct, or decoupled, payments separate from countercyclical payments. This study uses nationally representative confidential field‐level panel data with farmer‐reported per‐acre land values. We analyze the impact of decoupled and other farm program payments on farmland values. Using a fixed effects model and controlling for various factors that influence farmland values, we find that an additional dollar of decoupled payments has a large and statistically significant impact on farmland values of about $18 per acre. These results are comparable with similar studies undertaken in Europe.     

Alternative Approaches to Compensation and Producer Rights

When policies are changed, it is not uncommon for losers to be compensated. Economic theory and quantitative analysis are useful in determining the efficiency gains/losses associated with a policy change, but are little help in deciding what the approach to compensation should be. The amount of compensation varies, depending on, in part, the political clout of the parties being negatively affected by a policy change—compensation is what politicians and the sector demanding compensation can agree on. We formulate four approaches to producer compensation within the context of the Ontario Tobacco Transition Program, where producers would have suffered losses in the absence of compensation. The approaches range from providing zero compensation to providing compensation based on the entire value of the tobacco quota. The Canadian government chose the latter and compensated producers for the termination of the tobacco quota program based on an approach that far exceeded other possible compensation approaches.     

The Economic Impact of U.S. Tobacco Products Exports

The economic impacts of increasing U.S. tobacco exports on the U.S. economy are analyzed. Simulation of expanded exports to South Korea and Thailand are conducted. Over $1.1 billion in economic activity and 12,000 jobs were associated with tobacco export increases to these countries. Declining raw tobacco exports to Thailand, however, offset gains associated with greater cigarette sales. The resultant losses totaled $5.3 million in economic activity and over 378 jobs in the U.S.     

Explaining Differences in Milk Quota Values: The Role of Economic Efficiency

This article explores the relationship between milk quota values and economic efficiency in order to analyze government interventions in quota allocations among producers. For this purpose, we estimate quota values using a panel of Spanish dairy farms. Quota values are then decomposed into economic efficiency, price, and scale effects in order to assess the relative influence of these factors. We find that efficiency is important in explaining quota values but is uncorrelated with observable farm characteristics. This casts doubts on the government's ability to allocate quotas to efficient farms.     

The Impact of the 2013 CAP Reform on the Decoupled Payments’ Capitalisation into Land Values

We assess the effects of the 2013 CAP reform on the capitalisation of decoupled payments in land rental values. Our estimates suggest that the reform leads to an increase in the capitalisation of decoupled payments by an additional 18 cents for each Euro of decoupled payments relative to the pre‐reform situation. However, there is an important variation in the reform effects between Member States (MS) particularly between Old Member States (OMS) and New MS (NMS). In NMS, the capitalisation rate slightly reduces from 83% in the pre‐reform period to 79% in the post‐reform period. Although, the rate is significantly lower in OMS, it doubles (from 21% to 43%) due to the reform. The main sources of the post‐reform capitalisation in the European Union (EU) are the pre‐reform capitalisation accounting for 69% of the total post‐reform capitalisation, followed by the entitlement stock change with 19%, by the internal convergence of payments with 18%, the budget change (including external convergence) with 1%, and the differentiation of payments (redistributive payment) with ?7%. Overall, our estimates suggest that on average in the EU, the non‐farming landowners’ policy gains are 27% of the total decoupled payments in the post‐reform period compared to 18% in the pre‐reform period.     

The Impact of Coupled and Decoupled Government Subsidies on Off-Farm Labor Participation of U.S. Farm Operators

With the 1996 Farm Act, the United States introduced payments that were designed to be "decoupled." Labor allocation choices are likely to be affected by receipt of payments, and income from off-farm jobs has been the major source of income for most farm households for sometime. This article examines whether the 1996 change has affected the off-farm labor participation of farm households. We conclude that the observed increase in off-farm participation of farm operators who received payments was not the result of the 1996 policy change. Government payments, whether coupled or decoupled, have a negative effect on off-farm labor participation.     

Measuring the Trade Restrictiveness of Domestic Support using the EU Common Agricultural Policy as an Example

We develop an index that measures the overall trade effects of domestic support payments. Our index is based on the Mercantilist Trade Restrictiveness Index (MTRI) and is capable of analysing the development of the trade restrictiveness of domestic support payments over time and across countries. It facilitates the evaluation of agricultural policy reforms introducing changes in the composition of domestic support payments. We conduct this analysis with a computable general equilibrium model that is extended to depict detailed agricultural policies using the Common Agricultural Policy of the European Union (EU) as an example. For the representation of agricultural policies, we updated the underlying database by incorporating detailed EU domestic support payments taken from the OECD Producer Support Estimate (PSE) tables and reconcile PSE data with the WTO classification scheme. Our index confirms a decrease in trade distortion stemming from the implementation of decoupled support in the EU. In addition, the trade-equivalent protection rate shows that the trade restrictiveness of domestic support payments depends on the assumptions made with regard to the degree of decoupling of those payments.     

Capacity reduction,quota trading and productivity: the case of a fishery*

We present the first ex post study that quantitatively analyses the effects of a licence buy‐back and enhanced quota trading on the profitability and productivity of individual vessels in a fishery. Using firm‐level data and a profit index decomposition method, we find that small and large vessels and three different trawler fleets all experienced substantial productivity gains in the year immediately following a licence buy‐back and the establishment of a quota brokerage service. The apparent ongoing benefits of the buy‐back and increased quota trading over the sample period are in stark contrast to the generally unfavourable long‐term outcomes commonly associated with vessel buy‐backs in input‐controlled fisheries.     

Effects of direct payments on rice income variability in Japan*

The effects of direct payments on rice income variability in Japan are analysed based on a balanced panel dataset of Japanese rice farms for 2012–2016. Firstly, the contribution of income components to rice income variability and the effects of a direct payment reduction are discussed by applying variance decomposition. Secondly, robust regression techniques are used to measure the correlation between direct payments and rice income variability. The originality of this paper is that it disaggregates the effects of payments using a regression analysis of the effects of direct payments on income variability for Japan. This contrasts with the existing literature on this topic, which has largely focused on European Union countries. This paper discusses to what degree the reduction in direct payments increases income variability. The results reveal that direct payments decrease Japanese rice income variability. Indeed, after controlling for various farm characteristics, we find a negative relationship between the amount of direct payments linked to rice production and rice income variability. Finally, the results suggest that reducing direct payments when the rice price is falling would increase rice income variability.     

The Inefficiencies of Regionalised Milk Quota Trade

This paper estimates the inefficiencies associated with the regionalisation of the milk quota trade. An optimisation model is developed to estimate the economic value of quota. Quota values are aggregated to derive quota sale and purchase curves under two scenarios: first, where quotas can be traded nationally and second, where the trade of quota is regionally restricted. Quota trade is simulated and the consequent effects on supplier structure estimated. Through the derivation of sectoral cumulative cost curves it is possible to estimate the impact of regionalising quota trade on sector efficiency. The model is solved using National Farm Survey data from Ireland and the inefficiencies of regionalised quota trade in Ireland are estimated at €27 million. The paper concludes by discussing the implications of restricted quota trade, especially in the context of eventual quota removal.     

Is Passive Farming A Problem for Agriculture in the EU?

We address a new agricultural policy concern following the decoupling of CAP direct payments in 2005: passive farming, whereby landowners maintain their agricultural area to collect payments without producing commodities. It is claimed that passive farming is hindering agricultural development by ‘blocking’ access to farmland for expanding farmers. We evaluate the links between the EU's Single Payment Scheme (SPS), passive farming, land use and agricultural development. Following identification of the rational landowners’ optimal land‐use choice, we evaluate the effects of the SPS using a spatial, agent‐based model that simulates farmers’ competition for land in a case‐study region of Sweden. We show that passive farming does not constrain land from being used in production; on the contrary more land is used than would be the case without the SPS. We conclude that passive farming is not a problem for agriculture, but provides public goods that would otherwise be under provided: preservation of marginal farmland and future food security. However SPS payments on highly productive land inflate land values (capitalisation) and slow structural change, which hinder agricultural development. Consequently CAP goals could be better served by targeting payments on marginal land and phasing out payments to highly productive land.     

On the Deadweight Cost of Production Requirements for Geographically Differentiated Agricultural Products

This article investigates the welfare effects of alternate producer collusion schemes in a context where collusion is authorized in order to cover fixed costs. Using a linear equilibrium displacement model, we find evidence that, when the producer group is allowed to control quota levels, an input quota policy entails a smaller absolute deadweight loss than an output quota policy. This finding suggests that if producer groups are allowed to resort to production-distorting instruments to limit output, they will make production choices that are less costly for society than if they had been allowed to directly control output levels.     

Are "Decoupled" Farm Program Payments Really Decoupled? An Empirical Evaluation

This analysis utilizes farm-level data to evaluate the extent to which U.S. farm program benefits, particularly direct payments, bring about distortions in production. The issue is important in WTO negotiations and in the debate over the distortionary effects of decoupled ("green-box") payments. Our results suggest that the distortions brought about by AMTA payments, though statistically significant in some cases, are very modest. Larger effects are implied for market loss assistance payments. Probit models suggest that AMTA payments do not influence the likelihood that agents will acquire more land. Our results are reinforced using an aggregate county-level acreage model.     

How Decoupled are Decoupled Payments? The Evidence from Ireland

This article explores the production effects of the EU's system of decoupled payments and the implications for WTO negotiations. We compare survey data on Irish farmers' production plans post decoupling to the optimal outputs predicted by a farm-level profit maximisation model. The results show that, post decoupling, a significant number of farmers plan to use their decoupled payments to continue or expand economically non-viable production. An econometric analysis reveals that the decision to maintain or expand production levels post decoupling is not significantly influenced by current or future projected profitability levels. The analysis suggests likely widespread cross subsidisation of unprofitable production post decoupling but that aggregate production is still likely to decline relative to the traditional coupled, but production-limiting, blue box payments. If the EU wants to claim in the current WTO negotiations that decoupled payments amount to green box support, then the argument must be made that the payments have no, or at most minimal, trade distorting effects or effects on production. If it becomes apparent to members of the WTO that European farmers are using their decoupled income to subsidise market loss production, then the green boxing of the EU's decoupled payment scheme may come up for debate at the negotiations.     

How to achieve fairness in payments for ecosystem services? Insights from agrobiodiversity conservation auctions

This paper provides insights into the multiple dimensions of fairness in payments for ecosystem services (PES) using the results of pilot agrobiodiversity conservation auctions. In two sites in the Bolivian and Peruvian Andes farming groups bid for payments for the conservation of traditional crop varieties. We assess different payment rules relating to how to allocate payments among groups subject to a fixed conservation budget. The discriminatory, uniform and conditional payment rules tested in these case studies incorporate alternative principles of fairness, while resulting in varying conservation and distributional outcomes. The latter are measured in terms of the distributional equality of payments among farmers and groups, and the distributional effects of payments on different types of groups. Findings indicate that conservation and distributional outcomes are highly sensitive to the payment rule chosen and vary across study sites. There may be contexts where cost-effectiveness does not need to be traded-off against fairness. Yet given the number of competing fairness considerations, achieving PES outcomes that are perceived as fair is very challenging.