The dairy farming support system: Do the direct payments cause economic inefficiency?

Economic distortions created by the dairy farming support system in Iceland are examined in this paper. Specifically, the impact of the direct payments component of this system is analyzed. The analysis lead to the conclusion that the form of direct payments that has been used is in many ways well-suited to improve dairy farmers' living standards without creating additional social costs in terms of resource misallocation. It follows that it would be socially wasteful, as well as economically detrimental to dairy farmers, to replace this system with an economically less efficient way of providing them with the same amount of financial support.