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Abstract

Most policy analyses are conducted using a model of a single market for a homogenous commodity. Usually, the commodity of interest is not truley homogenous, but is treated as such for the sake of simplicity. In doing so, analysts are implicitly assuming that a single-market model of a homogeneous product closely approximates true policy effects. This paper explores the implications of this assumption. The effects of the homogeneity assumption are shown for the simple case of a product available in two qualities, when market-distorting policies are introduced. It is shown that, for plausible parameter values, ignoring quality responses can have substantial impacts on the estimated welafare effects of stereotypical commodity price support policies. In addition, for a given transfer to producers, a model that incorporates quality responses to policies will imply different settings for policy instruments than a model of homogeneous commodity, and in some cases, different instruments. For some transfers, the inclusion of quality responses will switch the transfer efficiency ranking of policies.

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