Measure of Waste Due to Quotas

This paper addresses the issue of measuring welfare losses due to imposition of a production quota. The topic of welfare measurement is important in agriculture because production quotas are a ubiquitous component of agricultural policy. While it is probably true that in the arena of policy decisions the somewhat subtle distinctions of alternative measures of loss with usually be swamped by errors in measuring them, it is important nonetheless that economists, at least, be clear about which concepts are being measured and why. Our objective is to elaborate briefly two alternative general equilibrium concepts (Diewert) of the welfare loss due to the imposition of a production quota, and to illustrate their use by considering the costs of the U.S. tobacco program. In addition to the two concepts elaborated here, other alternatives might be considered, and there is good reason to evaluate them for an open economy, rather than the closed economy model used here. Space considerations dictate that these alternatives be considered in another paper.