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Abstract

This paper examines the impact of a change in the advertising tax on prices, output, and welfare. Results show that a supply shift alone (i.e., advertising is ineffective and hence there is no demand shift) will result in higher retail prices, lower farm output, higher retail-farm price ratios, and losses in benefits to society. If the supply shift is accompanied by a demand shift due to effective advertising, the retail price will be higher. Farm output and the retail-farm price ratio, however, will be smaller compared to an isolated supply shift. Given the advertising elasticities found so far in empirical studies (less than 0.10), an increase in producer assessments or check-offs for the purpose of increasing demand through advertising will lead to welfare loss. Research and new product development may be .better alternatives to increasing demand from a social perspective.

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