Allocational Efficiency and Higher Food Production

A rise in the producer prices of food crops towards or above the level of world prices has two distinct effects: it increases the means and capacity of the grower to produce more food, and it also increases the incentive to do so. There is a will and there is a way. It would be possible to separate the two effects. Lump-sum subsidies with prices unchanged would provide the means without the incentives,1 while higher prices for particular crops combined with a land tax or a poll tax that takes away what farmers gain from higher prices would provide the incentives but not the means. It is now generally accepted that farmers are responsive to price incentives and that production will tend to increase when rewards are greater. The question is not ‘are farmers responsive to prices?’, but ‘how responsive to what intervening variables other than price, and on what assumptions about other prices?’ The response is quite different in magnitude according to whether the price of a specific crop is raised relative to others2 or whether the prices of all agricultural products are raised relative to the prices of industrial products. Supply responsiveness is much greater in the former case than in the latter, and evidence from one must not be used to support conclusions for the other.3 When the price of one crop goes up relatively to others, farmers will tend to switch resources from the less remunerative to the more remunerative crop. The response is measured by the cross elasticity of supply, which measures the percentage reduction in some other crop (say cotton) in response to a small percentage increase in the price of a given crop (say wheat).