Price Versus Stock Effect Policies For Reducing Excess Milk Production

This article presents a comparative dynamic analysis of the market impact of alternative U.S. policies designed to reduce excess capacity in milk production. Two policy options are examined based on an econometric model of the dairy industry and a dynamic simulation of the system. The stock effect policy relies on voluntary reductions in cow numbers to reduce milk supplies, while the price effect policy makes use of reductions in the support price levels to achieve the same goal. The simulation results are used to evaluate equilibrium prices and quantities for the farm and retail markets, government costs, and consumer and producer surpluses from 1986 to 1995 for each policy alternative. The analysis shows that farmers are better off under a voluntary supply control program, while consumers are better off under a support price reduction policy.