Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 12/08: Optimal agricultural policy and PSE measurement: an assessment and application to Norway

David Blandford (), Rolf Jens Brunstad (), Ivar Gaasland () and Erling Vårdal ()
Additional contact information
David Blandford: The Pennsylvania State University, University Park, PA, U.S.A., Postal: Office address: 112D Armsby Building, University Park, PA , U.S.
Rolf Jens Brunstad: The Norwegian School of Economics and Business Administration, Postal: Helleveien 30, N-5045 Bergen, Norway
Ivar Gaasland: INSTITUTE FOR RESEARCH IN ECONOMICS AND BUSINESS ADMINISTRATION, Postal: Breiviksveien 40, N-5045 Bergen, Norway
Erling Vårdal: University of Bergen, Department of Economics, Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway

Abstract: The producer support estimate calculated by the OECD is widely misused as an indicator of distortions created by agricultural policies. In this paper we demonstrate rigorously that a change in the relative (percentage) PSE is not an accurate indicator of the implications of policy reform for domestic welfare or for trade distortions. If there are positive externalities linked to agricultural inputs (e.g., land), we demonstrate that replacing output subsidies by optimal Pigouvian subsidies may result in an increase or a reduction in relative PSE depending on the parameters of the production function. Using the example of Norway we show that an increase in the relative PSE is likely if the focus of agricultural policies shifts from income support to the provision of public goods.

Keywords: Agricultural policy; trade distortion; domestic support; producer support estimate PSE).

JEL-codes: C61; F13; F18; Q17; Q18

23 pages, August 23, 2008

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