Quality Responses to Agricultural Policies

Most policy analyses are conducted using a model of a single market for a homogeneous commodity. Usually, the commodity of interest is not truly homogeneous, but the homogeneity assumption is imposed 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 welfare effects of 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 a homogeneous commodity, and in some cases, different instruments. For some transfers, including quality responses will switch the ranking of policies.

Issue Date:
Aug 08 1999
Publication Type:
Conference Paper/ Presentation
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 Record created 2018-04-16, last modified 2020-10-28

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