Agricultural Support Policies in Imperfectly Competitive Markets: Why Market Power Matters in Policy Design

13 Pages Posted: 8 Apr 2020

See all articles by Rachael E. Goodhue

Rachael E. Goodhue

University of California, Davis - Department of Agricultural and Resource Economics

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics

Date Written: October 2011

Abstract

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.

Keywords: agricultural policy, deficiency payment program, market power, oligopoly, oligopsony, price floor program, price support program

Suggested Citation

Goodhue, Rachael E. and Sexton, Richard J., Agricultural Support Policies in Imperfectly Competitive Markets: Why Market Power Matters in Policy Design (October 2011). American Journal of Agricultural Economics, Vol. 93, Issue 5, pp. 1328-1340, 2011, Available at SSRN: https://ssrn.com/abstract=3571602 or http://dx.doi.org/10.1093/ajae/aar050

Rachael E. Goodhue (Contact Author)

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States
916-754-7812 (Phone)
530-752-5614 (Fax)

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
327 Voorhies
Davis, CA 95616
United States
530-752-2219 (Phone)

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