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Agricultural Support Policies in Imperfectly Competitive Markets: Why Market Power Matters in Policy Design
Author(s) -
Russo Carlo,
Goodhue Rachael E.,
Sexton Richard J.
Publication year - 2011
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1093/ajae/aar050
Subject(s) - oligopoly , market power , economics , economic interventionism , perfect competition , government (linguistics) , welfare , microeconomics , intervention (counseling) , monopsony , industrial organization , payment , market economy , monopoly , psychology , linguistics , philosophy , finance , psychiatry , politics , political science , law
Most agricultural policy analysis assumes that markets are perfectly competitive, despite increasing evidence to the contrary. We demonstrate that the interaction of market power and government intervention may lead to outcomes that are counter to key results of policy analysis for perfectly competitive markets. We show that market power may reduce or eliminate entirely the net welfare benefits from removing two traditional support mechanisms, price floors and deficiency payments, and may increase considerably the government's cost of implementing either of them. Accordingly, optimally designed price support measures may improve welfare in the presence of downstream oligopoly and/or oligopsony power.