Cross‐Subsidization Due to Inframarginal Support in Agriculture: A General Theory and Empirical Evidence

A general theory of cross-subsidization due to inframarginal support is developed. Two sources of output distortion are identified: exit deterrence and extramarginal output. Some firms would not be in business without the subsidy. Cost savings due to declining average costs are always greater than the losses incurred where price equals marginal cost. Moreover, it is theoretically possible for inframarginal subsidies to expand output more than equivalent fully coupled subsidies. Empirical analysis of U.S. dairy subsidies isolates these components of cross-subsidization and finds distortions from inframarginal support to be substantial, with implications for trade negotiations, dispute settlement, and policy formulation. Copyright 2008, Oxford University Press.

[1]  D. Sumner,et al.  Restricting the Market for Quota: An Analysis of Tobacco Production Rights with Corroboration from Congressional Testimony , 1995, Journal of Political Economy.

[2]  W. Thurman,et al.  Marketing Quotas and Random Yields: Marginal Effects of Inframarginal Subsidies on Peanut Supply , 1994 .

[3]  A. Mishra,et al.  Are “Decoupled” Farm Program Payments Really Decoupled? An Empirical Evaluation , 2006 .

[4]  M. Burfisher,et al.  Decoupled Payments: Household Income Transfers in Contemporary U.S. Agriculture , 2003 .

[5]  I. Krinsky,et al.  On Approximating the Statistical Properties of Elasticities , 1986 .

[6]  Paolo Sckokai,et al.  Modeling the Reforms of the Common Agricultural Policy for Arable Crops Under Uncertainty , 2006 .

[7]  James B. Whitaker,et al.  The Impact of Decoupled Payments on the Cost of Operating Capital , 2011 .

[8]  Harry de Gorter,et al.  Disentangling the Consequences of Direct Payment Schemes in Agriculture on Fixed Costs, Exit Decisions, and Output , 2005 .

[9]  T. Sicular.  Plan and Market in China's Agricultural Commerce , 1988, Journal of Political Economy.

[10]  J. Chavas,et al.  Aggregate Milk Supply Response and Investment Behavior on U.S. Dairy Farms , 1986 .

[11]  D. Just,et al.  Production Incentives from Static Decoupling: Entry, Exit and Use Exclusion Restrictions , 2009 .

[12]  Jikun Huang,et al.  Distortions to Agricultural Incentives in China , 2007 .

[13]  Loren W. Tauer,et al.  Can the small dairy farm remain competitive in US agriculture , 2006 .

[14]  J. Alston,et al.  Some Neglected Social Costs of Government Spending in Farm Programs , 1990 .

[15]  D. Blandford,et al.  Farm income support with minimal trade distortions , 1989 .

[16]  D. Sumner,et al.  Quotas Without Supply Control: Effects of Dairy Quota Policy in California , 1996 .

[17]  Sara D. Short.  Characteristics and Production Costs of U.S. Dairy Operations , 2004 .

[18]  W. Thurman,et al.  The Economic Effects of Supply Controls: The Simple Analytics of the U. S. Peanut Program , 1990, The Journal of Law and Economics.