Efficiency of Decoupled Farm Programs Under Distortionary Taxation
Author(s) -
Moschini Giancarlo,
Sckokai Paolo
Publication year - 1994
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 - 10.2307/1243649
Subject(s) - economics , decoupling (probability) , tariff , lump sum , welfare , scope (computer science) , revenue , microeconomics , market power , government revenue , deadweight loss , government (linguistics) , international economics , market economy , payment , finance , linguistics , philosophy , control engineering , computer science , engineering , monopoly , programming language
Abstract When lump‐sum taxation is not feasible, decoupled transfers to farmers (which require raising government revenue) will entail welfare loss somewhere in the economy. Assuming the government's objective is to assure a given welfare level for farmers, we show that when decoupling is possible, free trade is always superior to some tariff protection for a small country, even under distortionary taxation. As expected, for a large country there is scope for an optimal tariff policy that improves the terms of trade. However, we show a separation between the exercise of market power through an optimal tariff, and the interaction of distortionary taxation with transfers to farmers. We conclude that decoupling is usually desirable, even in a distorted economy in which lump‐sum taxation is not feasible.