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Agricultural Policies in the Presence of Distorting Taxes

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  • Parry, Ian

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    (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.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-98-05.

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Date of creation: 01 Nov 1997
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Handle: RePEc:rff:dpaper:dp-98-05

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  1. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  2. Ian W. H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," NBER Working Papers 5967, National Bureau of Economic Research, Inc.
  3. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  4. Gardner, Bruce L, 1987. "Causes of U.S. Farm Commodity Programs," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 290-310, April.
  5. Moschini, GianCarlo & Sckokai, Paolo, 1994. "Efficiency of Decoupled Farm Programs Under Distortionary Taxatioin," Staff General Research Papers 12713, Iowa State University, Department of Economics.
  6. Angus Deaton, 1979. "Optimal Taxes and the Structure of Preferences," Working Papers 506, Princeton University, Department of Economics, Industrial Relations Section..
  7. Bruce Gardner, 1981. "Efficient Redistribution in Agricultural Commodity Markets," University of Chicago - George G. Stigler Center for Study of Economy and State 20, Chicago - Center for Study of Economy and State.
  8. Browning, Edgar K., 1997. "A neglected welfare cost of monopoly--and most other product market distortions," Journal of Public Economics, Elsevier, vol. 66(1), pages 127-144, October.
  9. Parry, Ian W. H., 1997. "Environmental taxes and quotas in the presence of distorting taxes in factor markets," Resource and Energy Economics, Elsevier, vol. 19(3), pages 203-220, August.
  10. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 37-54.
  11. A. Lans Bovenberg & Lawrence H. Goulder, 1995. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes:General Equilibrium Analyses," NBER Working Papers 5117, National Bureau of Economic Research, Inc.
  12. Ian Parry, 1998. "A Second-Best Analysis of Environmental Subsidies," International Tax and Public Finance, Springer, vol. 5(2), pages 153-170, May.
  13. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August.
  14. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
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Cited by:
  1. Sarah E. West & Roberton C. Williams III, 2004. "Empirical Estimates for Environmental Policy Making in a Second- Best Setting," Public Economics 0402005, EconWPA.
  2. 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.
  3. 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.
  4. de Gorter, Harry, 2008. "Explaining Inefficient Policy Instruments," Agricultural Distortions Working Paper 48638, World Bank.
  5. Baffes, John & De Gorter, Harry, 2005. "Disciplining agricultural support through decoupling," Policy Research Working Paper Series 3533, The World Bank.
  6. Brian Murray & Andrew Keeler & Walter Thurman, 2005. "Tax Interaction Effects, Environmental Regulation, and “Rule of Thumb” Adjustments to Social Cost," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 30(1), pages 73-92, January.

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