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Agricultural Policies in the Presence of Distorting Taxes

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  • Parry, Ian

    (Resources for the Future)

Abstract
This paper uses analytical and numerical general equilibrium models to assess the efficiency impacts of agricultural policies in a second-best setting with pre-existing distortionary taxes. We analyze production subsidies, production quotas, acreage controls, subsidies for acreage reductions and lump sum transfers to agricultural producers. We find that pre-existing taxes raise the cost of all these policies and by a substantial amount. Under our central estimates this increase in cost is typically at least 100-200 percent. Two effects underlie these results. First, raising the rates of distortionary taxes to finance subsidy policies leads to additional efficiency losses. Second, policies that raise (lower) the costs of producing agricultural output lead to a reduction (increase) in the economy-wide level of employment. This implies an efficiency loss (gain) in the labor market, which is distorted by taxes. The latter effect is not incorporated in earlier studies. Consequently, previous studies have significantly overstated the costs of production subsidies and understated the costs of production quotas, acreage controls and subsidies for acreage reductions.

Suggested Citation

  • Parry, Ian, 1997. "Agricultural Policies in the Presence of Distorting Taxes," RFF Working Paper Series dp-98-05, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-98-05
    as

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    References listed on IDEAS

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    1. Giancarlo Moschini & Paolo Sckokai, 1994. "Efficiency of Decoupled Farm Programs Under Distortionary Taxation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(3), pages 362-370.
    2. Ian W.H. Parry, 2002. "A Second-Best Analysis of Environmental Subsidies," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 28, pages 555-572, Edward Elgar Publishing.
    3. Julian M. Alston & Brian H. Hurd, 1990. "Some Neglected Social Costs of Government Spending in Farm Programs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(1), pages 149-156.
    4. Ian W.H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 2002. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 25, pages 471-503, Edward Elgar Publishing.
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    13. Ian W.H. Parry, 2002. "Environmental Taxes and Quotas in the Presence of Distorting Taxes in Factor Markets," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 23, pages 429-446, Edward Elgar Publishing.
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    Cited by:

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    2. Nurul Atiqah Binti Mohd Suib & Norlida Hanim Mohd Salleh & Mohd Fazim Ahmad, 2023. "The economic well-being of smallholders and challenges during COVID-19 pandemic: A review," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 69(1), pages 35-44.
    3. Jiménez Giraldo, Dora Elena & Saldarriaga-Isaza, Adrián & Cicowiez, Martin, 2019. "Distributional and economy-wide effects of post-conflict policy in Colombia," Conference papers 333124, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    4. de Gorter, Harry, 2008. "Explaining Inefficient Policy Instruments," Agricultural Distortions Working Paper Series 48638, World Bank.
    5. Sarah E. West & Roberton C. Williams III, 2004. "Empirical Estimates for Environmental Policy Making in a Second- Best Setting," Public Economics 0402005, University Library of Munich, Germany.
    6. West, Sarah E. & Williams III, Roberton C., 2007. "Optimal taxation and cross-price effects on labor supply: Estimates of the optimal gas tax," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 593-617, April.
    7. Aldanondo, Ana Maria & Puertolas, Javier, 2002. "International Quota Transfer and Intermediate Goods," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24851, European Association of Agricultural Economists.
    8. Baffes, John & De Gorter, Harry, 2005. "Disciplining agricultural support through decoupling," Policy Research Working Paper Series 3533, The World Bank.

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