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Plenty of governments are dishing out large subsidies to their farmers. But are they really benefiting from them? If they rent the land, classic theory would indicate the land owner who be able to extract the whole subsidy from the renting farmer, simply because of the inelastic supply of land, assuming perfect competition for land.
Barrett Kirwan answers this question using US data and exploiting changes in farm subsidies. Kirwan finds that tenants actually manage to keep 75% of the subsidy. Why? Because the rental market is not perfect competition after all, something that is confirmed by the fact that tenants manage to extract more where there is less competition.
While I find it hard to justify agricultural subsidies, they are targeted towards those who farm the land, not those who own it. And it appears that this is working.
Wednesday, May 6, 2009
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1 comment:
This analysis is very interesting. I personally don't hold much stock in our ability to be rational. I'm not surprised that markets don't operate the way economists think they should. In this case, it's nice that the failure of markets to work "efficiently" actually helps policy.
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