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The Influence of the Common Agricultural Policy and Heterogeneous Land Quality on Land Rent and Land Allocation

  • Feichtinger, Paul
  • Salhofer, Klaus

Against the background of the current discussion about the EU’s common agricultural policy (CAP) after 2013, the question of the impact of government support on land prices is crucially important. Validation of the CAP’s success also hinges on a proper assessment of a choice of policy instruments. This study therefore has the objective of investigating on a theoretical basis the effects of different government support measures on land rental prices and land allocation. The different measures under consideration are the price support, area payments and decoupled single farm payments (SFPs) of the CAP. Our approach evaluates the potential impact of each measure based on a Ricardian land rent model with heterogeneous land quality and multiple land uses. We start with a simple model of one output and two inputs, where a Cobb-Douglas production technology is assumed between the two factors of land and non-land inputs. In a second step, an outside option is introduced. This outside option, as opposed to land use of the Ricardian type, is independent of land quality. The results show that area payments and SFPs become fully capitalised into land rents, whereas in a price support scheme the capitalisation depends on per-acreage productivity. Moreover, in a price support scheme and a historical model, the capitalisation is positively influenced by land quality. Both area payments and price supports influence land allocation across different uses compared with no subsidies, where the shift tends to be larger in an area payment scheme than in a price support scheme. By contrast, SFPs do not influence land allocation.

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Paper provided by Centre for European Policy Studies in its series Factor Markets Working Papers with number 149.

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Length: 13 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:eps:fmwppr:149
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  1. Chantal Le Mouel, 2004. "Impacts of alternative agricultural income support schemes on multiple policy goals," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 31(2), pages 125-148, June.
  2. Laure Latruffe & Chantal Le Mouël, 2009. "Capitalization Of Government Support In Agricultural Land Prices: What Do We Know?," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 659-691, 09.
  3. Hongli Feng & Bruce A. Babcock, 2010. "Impacts of Ethanol on Planted Acreage in Market Equilibrium," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(3), pages 789-802.
  4. Frédéric Courleux & Hervé Guyomard & Fabrice Levert & Laurent Piet, 2008. "How the EU Single Farm Payment should be modelled: lump-sum transfers, area payments or… what else?," Working Papers SMART - LERECO 08-01, INRA UMR SMART.
  5. Johan Swinnen & Pavel Ciaian & d’Artis Kancs, 2008. "Functioning of Land Markets in the EU Member States," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 51(2), pages 48-62.
  6. Ciaian, Pavel & Kancs, d’Artis & Swinnen, Jo, 2012. "Income Distributional Effects of Decoupled Payments: Single Payment Scheme in the European Union," Factor Markets Working Papers 134, Centre for European Policy Studies.
  7. repec:inr:wpaper:155435 is not listed on IDEAS
  8. Guyomard, Herve & Lankoski, Jussi E. & Ollikainen, Markku, 2006. "Impacts of Agri-Environmental Policies on Land Allocation and Land Prices," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25310, International Association of Agricultural Economists.
  9. Vincent Martinet, 2012. "Effect of soil heterogeneity on the welfare economics of biofuel policies," EconomiX Working Papers 2012-13, University of Paris West - Nanterre la Défense, EconomiX.
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