Production Impact of Green and Near
Green Policies
James Rude
November 15-6, 2001
Outline
• Distribution of domestic support
• Distribution of green box support
• Production effects of compensatory
payments
• When green isn’t green
How EU support stacks up
AMS limit 72
1998/99 Notification
Pieces of Green
1%
11%
28%
Public stock holding
General Services
1%
Decoupled income
1%
6%
Regional development
Domestic food aid
Investment aid
26%
Disasters
Retirment programs
0%
26%
Enviroment
1998/99 Notification: Total Green 19.2 Billion Euro
Blue on Blue
max h, x,   pc f c ( xc hc )  po f o ( xo ho )  wc xc  wo xo  sc hc  so ho
  ( H  G  hc  ho )  gG
FOC:
pc   f c /  hc  sc  po   f o /  ho  so
pc   f c /  xc  wc  0
po   f o /  xo  wo  0
H  G  hc  ho  0
• equal compensation payments, sc=so cancel out neutrality
• absence of compensation payments from MVPx equations 
input use, and yields, are independent of payments
Blue on Blue
(continued)
• Do comparative statics on this system of equations
 hc /  sc  0
and
 ho /  so  0
 hc /  so  0
and
 ho /  sc  0
• Jointness caused by shared fixed input, H,crops are
strong substitutes. Crop specific subsidies may off-set each
other or at least reduce the impact.
• Compensatory payments are partially decoupled (yield
yes; area no) with off-setting effects on substitute crops
Blue Man Group
• Several studies examine the empirical impact of per hectare
compensation payments on crop mix
– Guyomard, Baudry, and Carpentier (1996) France
• Similar approach but uses dual with restricted profit
function  analytical results similar (s’s may cancel)
• Evaluate impacts on basis of crop specific profit
functions estimated for pre-CAP reform period
– supply response small due to off-setting cross effects and
fixed total area
– Oude Lansink and Peerlings (1996) Netherlands
• Estimation with pre-CAP reform data
– 25% reduction in area payments  16%  cereal and oilseeds area
Blue on Blue
(continued)
– Moro and Sckokai (1999) Italy
•
•
•
•
Similar estimation approach
Post CAP reform data
Professional Producers
Low responsiveness to compensatory payments
– cross elasticities with respect to compensatory payments are
negative and small
Heart Ache on Heart Ache
• Even if the s’s cancel each other out, they still
represent a direct transfer to agriculture
• Are these transfers production neutral if the
recipient can not affect the size of the pay-out?
– idea of lump sum transfers
• When isn’t a direct payment neutral?
–
–
–
–
Wealth effects reduce risk aversion
Transfer reduces the variability in income
Wealth transfer relaxes debt constraints
Expectation effect: increase base in anticipation of new
pay-out related to this new higher base
– Long Run entry and exit decisions
Till the End of Time
1% Decoupled programs:
agri-monetary aids
26% General Services:
– research, pest and disease control, extension,
inspection, market promotion, infrastructure
services
– public good arguments  optimal value of
service
• too little worse than too much
• what is public good: non-rival/non-exclusive
Desperate Measures
0.1% public stock holding
- surplus reduction
1% domestic food aid
- surplus reduction
1% disaster assistance
- low slung safety net
6% retirement program
- structural adjustment -direct payments
- unintended consequences
A Redder Shade of Green
28% Investment Aids
- where is market failure?
- economy wide macro structural
adjustment -OK
- infrastructure?
26% environmental aids
- direct payments compensating
for compliance
- can design these programs to transfer
a lot of money or little money and get
same result
11% regional development
- where is the market failure?
- AoA contradicts the SCM