It was suggested that heterogeneity is a major cause for the gradual processes of diffusion of new technology in agriculture. Farm size differences were found to be the major explanatory variable for differences in the tendency to adopt “lumpy” technology such as tractors and computers . Other dimensions of heterogeneity among individuals that were found to substantially affect technological choices include education, age, information, and risk preferences. The surveys present evidence that differences in physical features such as weather and land guality and infrastructure were responsible for differences In adoption patterns between regions. I-Ieterogeneity of the farm population is reflected by the partial participation in many government commodity programs. Rausser, Zilbennan, and Just demonstrated that high-quality lands are more likely to be utilized by participants in diversion programs who tend to divert low quality lands. Calvin found that size, financial situation, and productive capacity affect program participation choices. Heterogeneity and variability have to be incorporated into policy modeling for several reasons. First, the use of aggregate relationships, which assumes average behavior to be representative, may lead to very erroneous policy predictors. For example, an analysis of the impact of pollution regulations with a representative farm is likely to conclude that the introduction of a pollution tax is likely to reduce both total output and the pollution output ratio. Hochman and Zilberman showed that, for the case of a polluting industry where more cost-effective, modern producers are also more pollution intensive ,procona valencia a pollution tax tends to reduce total pollution but may increase the pollution/output ratio since it may cause the older, least cost-effective, and polluting producers to stop operations.
They also showed that, with heterogeneity, a tax may attain a regional pollution target at least cost but a standard may attain it with more output and cause smaller increases in price. Second, recognition of heterogeneity is essential for analyzing inter group equity efforts. There have been much concern about the relative inputs of agricultural policies on well-being in terms of different sizes and the distribution of income within agriculture and the structure of agricultural industries . Third, impacts of regulation may vary drastically across regions and must be spelled out for distributional analysis. Table 2, taken from Lichtenberg, Zilberman, and Harper , demonstrates the differences in regional \Velfare effects associated with government regulation using parameters of the cotton industry at the late 1970s. The table presents the relative welfare impacts of regulations that increase producer costs by 1 percent. Cotton producers are divided to four regions , and impacts of policies affecting each of these regions are estimated for all producer groups, consumers, and society as a whole. The analysis recognizes export demand for the product, and impacts of the policies on export revenues are also considered. It shows that the overall effects of a I-percent increase in cost in any of the regions are quite small. However, increases in cost in three of the regions are likely to increase overall U. S. wei fare due to increases in price and export revenues. On the other hand, an increase in California’s cost will reduce overall welfare because of the low supply elasticity of producers in that state. A I-percent increase in cost across the board will have a substantial effect on the overall domestic welfare and reduce consumer welfare. It will reduce the welfare of growers at the Southeast and Delta, with high cost and elastic supply, and increase the welfare of California and Plains producers who have lower cost and inelastic supply. Relatively, the distributional impacts reflecting heterogeneity among producers in this example are much larger than the overall efficiency effects.
Agricultural economists, such as Schultz and Cochrane , have realized that some salient features of the agricultural sector led to an “oversupply” trap-namely, situations where rates of return in the agricultural sector are far below the rest of the economy and the income of the rural sector does not keep up with the economy as a whole. The inelastic nature of the demand to agricultural products, the constant development of new agricultural technologies and product varieties, and the “rigid” nature of agricultural assets and inputs are among the causes of this oversupply problem. In recent years, however, it became quite clear that government policies aimed at addressing the “agricultural oversupply problem” made the situation worse. Government price support and inventory management programs actually contributed to increased production and inventory accumulation. Income-support schemes, such as diversion payment and even some set-aside programs, are likely to be contributors to oversupply and, through the resulting low prices, cause the need for further subsidization of the farm sector. These . policies did not decouple income support levels from the actual production levels. They presented incentives to farmers to overinvest and overproduce. A recent study of Just, Lichtenberg, and Zilberman demonstrates empirically that deficiency payments contributed substantially to extensive introduction of center-pivot irrigation and overexploitation of resources in the Midwest. Rausser, Zilberman, and Just argued that, because of land quality heterogeneity, farmers tend to set aside lower quality lands, and that action serves to increase per-acre yield after diversion. High and secure target prices tend to encourage use of variable inputs above what is suggested by market prices, and that serves as another source of increased supply. Finally, it has been recognized that the use of past performance as a base for payment has made target prices serve as a “de facto” price with respect to long term decisions which have contributed to upward bias in agricultural supply.
Thus, an important requirement from new policy regimes in agriculture is that it will not contribute to the oversupply problem but, rather, will mitigate it. Another major concern, closely related to the “oversupply” problem, is the instability of agricultural production levels and prices. The “oversupply” problem, caused by inherent properties of the agricultural sector and modified by government policies, has resulted in agricultural prices and returns that, on the average, are too low. However, prices and product availability have had substantial fluctuations. and the extensive economic literature on stabilization demonstrated that these fluctuations have been sources of much welfare loss. The instability and randomness of agriculture mentioned above have been major contributors to price instability, but other factors have also been sources of instability. Moreover, the inelastic nature of demands of agricultural products has magnified the fluctuation in prices in response to variations in supply. Government has constantly attempted to reduce the variability of agricultural prices through inventory control policies. These policies have been very costly because they have led to rapid accumulations of grain stocks which are expensive to carry and have also led to inventory reduction expenditures such as those associated with the payment-in-kind program of 1983. Research on the economics of stabilization has indicated some of the pitfalls associated with programs aimed at stabilizing prices. They argued that public inventory control activities, in part, served to replace private storage activities but, in essence, were a form of income transfer to producers. They also argued that public inventory support programs may reduce economic welfare by their tendency to lead to excessive srock accumulation. Moreover,flower bucket it seems that some factors that contributed to the oversupply problem also resulted in the excessive inventory problem-including some of the income-support policies of the past. Thus, a policy reform aimed at addressing the oversupply problem should reduce the tendency to excessively accumulate inventories while containing agricultural prices within a reasonable range. The low pnces and returns for producers in the farm sector, representing excessive productive capacity and requiring increasing government supports, have been major issues of concern and the reasons for government policies. The sustainability and the environmental consequence of agricultural activities have also become subjects of much concern. A major cause for the excessive supply and production in agriculture is the I introduction and intensive use of modern inputs such as chemical fertilizers and pesticides. Many of the inputs used by agriculture are exhaustible resources; they include water stocks and quality, top soils, and vulnerability to pesticides . Continuous depletion of these agricultural resources risks the sustainability of existing production levels-not to mention the ability to increase production in the long run. Moreover, the use of modern inputs in agriculture has resulted in substantial j externality costs.
Agricultural chemicals are major contaminants of bodies of water reducing productivity of many fisheries and risking the health of consumers. For example, the use of DBCP in California has resulted in a substantial cost of providing safe drinking water . While it is difficult to quantify the costs of groundwater contaminations by agriculture, a partial estimation of these costs done by Christensen and Ribaudo showed it to be higher than $2.5 billion annually. Thus, the “flip side” of the “excessive supply” problem is the excessive depletion of agricultural resources and negative externalities imposed by agriculture. Note that a reduction in production levels may alleviate both problems, and policies addressing one problem may also serve to address the other problem. Another issue of concern is maintenance of the competitive structure of agriculture and the traditional life-style viability of rural communities. This concern is of much importance in Europe where countries such as France and Germany have made substantial efforts in preserving their rural communities and life style. Technological changes, combined with the rise in labor cost and reduction in food prices, tend to increase the size of viable agricultural operations and may result in a structural change in the average farm size and a substantial reduction in the number of farms. This process endangers the survival of many “family farms” and preservation of the rural sector as we know it. The government is pressured to step in and to slow down this process and mitigate its impacts. Equity and distributional considerations playa crucial role in policy design. As Pe1tzman argued, the distributional effects of a policy reform plan determine its political palatability: Therefore, policy analysis and design efforts have to estimate the distributional implications of a proposed policy and suggest transfer and compensation arrangements that will assure the policymaker political support. One has to distinguish between intersectoral and intrasectoral considerations and address both in policy analysis. One manifestation of intersectoral heterogeneity is farm size distribution. Regional heterogeneity is another source of concern, and regional considerations are especially important in determining the political response to agricultural policy reform. Furthermore, the intraregional impacts of certain policies may be larger in relative terms than the other efficiency effects. Regional impacts should be assessed in the design of policy reform, and regional considerations should have a high priority in the design of compensation schemes needed to politically facilitate welfare-improving policies. Intrasectoral effects include impacts of policies aimed at one agricultural commodity on economic welfare included with the production and consumption of other products. The first type of impacts includes assessment of, say, sugar import quotas or corn production or impacts of policies affecting the supply and price of corn on the livestock sectors. Agricultural policies have been viewed over the last 30 years as part of a food policy that aimed at providing sufficient and affordable food to the U.S. population. Policy reform should explicitly address impacts of policies on consumers’ welfare, especially welfare of the poor, and introduce mechanisms to address these issues. Finally, a major impetus for the design of agricultural policy reforms is the heavy burden that the finance of agricultural programs imposes on government. Implied government expenditures should be a key criterion for assessment of any new policy design. The changes and problems of the agricultural sector dictate several key objectives that a comprehensive policy may need to meet. These objectives are to secure food supplies at reasonable prices; to prevent hunger and assure adequate nutritional intake for critical population groups ; to assure stable and fair returns and income to farmers and the rural sector; to control depletion of agricultural natural resources and work toward a sustainable agricultural system; to maintain environmental quality and control the negative environmental side effects of agricultural production; to protect the health and safety of farmers, farm workers, and consumers; to preserve the integrity of the rural sector and protect the viability of “family farms” and the competitive nature of agricultural industries; to obtain efficiency in resource allocation and production patterns; to promote innovation and flexibility in agriculture and food production; and to reduce the burden imposed on government financing of agricultural and food programs and policies. Similar objectives were presented by Brandow and Cochrane .