TRUCKING FUEL TAXES AND ECONOMIC EFFICIENCY IN PRIMARY GRAIN TRANSPORTATION

A tax on fuel is one of the primary mechanisms for reducing truck transport externalities such as greenhouse gas emissions, road damage, congestion, and accidents. The economic efficiency properties of a fuel tax are examined for the farm-to-elevator grain trucking sector--a sector for which the road damage externality is often severe. Because trucking volumes cumulate more rapidly near the delivery points, marginal external cost is generally not proportional to distance. Further, noncompetitive FOB pricing by grain buyers implies that road tax discounts to offset price markups should be independent of location. In both cases, a fuel tax is not capable of efficiently addressing the externality. With discriminatory pricing by buyers, "cross-hauling" emerges and the optimal fuel tax is unexpectedly high because the buyer passes on only a portion of the tax to the farmer. In a simple example with discriminatory pricing, the optimal fuel tax reduces excess average trucking distance by less that 50%.Agricultural and Food Policy,

A STOCHASTIC DYNAMIC PROGRAMMING MODEL OF DIRECT SUBSIDY PAYMENTS AND AGRICULTURAL INVESTMENT

A stochastic dynamic programming model is used to compare the farmland investment impact of a fully decoupled direct payment and a standard price subsidy. The direct payment induces the farmer to invest because it lowers the farm's debt to asset ratio, which in turn reduces the probability of bankruptcy. The value of the real option to defer the investment decision is lower with a lower risk of bankruptcy, and thus the direct payment results in a higher probability of immediate investment. Simulation results demonstrate that for a farm facing moderate revenue and land price variability, the impact of a decoupled direct payment on farm investment is nearly as large as the investment impact of an equal-sized price subsidy. These results suggest that direct payments, such as those associated with U.S. production flexibility contracts, should be carefully scrutinized in on-going multilateral trade negotiations.Agricultural and Food Policy, Agricultural Finance, International Development,

Economic Features of Canadian Organic Food at the Mass-market Retail Level

Over the past decade, Canada’s organic food industry has focused on the production of organic grains, oilseeds, fruits and vegetables and a limited amount of organic dairy products. Canadian organic grains and oilseeds are mostly destined for export, whereas Canadian organic fruits and vegetables and dairy products are mostly consumed domestically. With the exception of dairy products and a few other products such as breakfast cereal and fruit juice, Canadian companies have been mostly absent from the rapidly growing markets for processed organic foods. The extent to which these markets are currently being penetrated by Canadian organic food manufacturers and the size of the price premiums earned by these companies are worthy of investigation. Very little information exists about market structure and price premiums for processed organic foods sold in North American mass-market retail outlets. Market studies of Canada’s organic food market typically use a previously determined 30 percent price premium estimate for organic foods as a whole, and most studies are silent about specific characteristics of organic food manufacturers. In order for Canadian firms to increase their presence in the market for processed organic foods, more detailed information about market structure and the distribution of price premiums is needed.Food Consumption/Nutrition/Food Safety, International Relations/Trade,

TIME INCONSISTENT RESOURCE CONSERVATION CONTRACTS

Are commonly observed resource conservation contracts efficient? In this paper we construct a model that embodies common characteristics of resource contracts. Using this model, we analyze a large class of real-world resource contracts and find them to be economically inefficient. This inefficiency stems from a time inconsistency inherent in these contracts. There are two possible ways to overcome this time inconsistency. The first is to employ a sufficiently large penalty for early termination of the contract. The second and possibly easier method is to offer an upward sloping conservation payment schedule so far overlooked by resource contracts. Under this payment schedule, the agent's ex-ante and ex-post contract choices coincide, social externalities are fully internalized, and the contractual outcome is economically efficient even in the absence of a penalty for early termination.Resource /Energy Economics and Policy,

Public regulation of R&D racings

The purpose of the paper is to theoretically examine the welfare implications of public sector involvement in agricultural biotechnology R&D. The model assumes that firms (either a private duopoly consisting of a pair of for-profit firms or a mixed duopoly consisting of one for-profit firm and one public firm) compete in a winner-take-all patent race that is subject to R&D spillovers. Unlike previous research, spillovers are explicitly incorporated into the race, and the size of the prize that accrues to the winner, as well as the size of the ex post social surplus, is contingent on whether or not the public firm participates in the stage two product market. The welfare results concerning the implication of public sector involvement in the R&D race have several unexpected properties because of the interaction of the three sources of market failure (underinvestment due to spillovers, overinvestment due to winner-take-all racing and monopoly pricing in the product market). The main result is that the R&D subsidy or tax, while effective at improving the efficiency of the R&D outcome, is not effective at correcting the monopoly pricing market failure in the product market. The public firm, on the other hand, is able to simultaneously shift the R&D outcome toward first-best and reduce the expected distortion in the product market. The public firm invests particularly aggressively when R&D spillovers are high and the deadweight loss from monopoly pricing in the product market is high. An important problem with public firm participation in the R&D race is that cost smoothing inefficiencies arise because the public firm will either invest at a relatively high level to address the underinvestment externality, or invest at a relatively low level to address the overinvestment externality. Cost smoothing considerations always prevents attainment of first-best when product market externalities are present.Research and Development/Tech Change/Emerging Technologies,

Scientific Uncertainty and Climate Change Policy

Environmental Economics and Policy,

Uncertainty and Specific Investment with Weak Contract Enforcement

The relationship between price uncertainty and specific investment is examined in a dynamic model that integrates the theories of real options and investment holdup. Because of weak contract enforcement, bilateral firms cannot use a contract to govern their bilateral investment and exchange relationship. These firms instead rely on an implicit self-enforcing agreement, and they reduce the investment distortion by negotiating an ex ante transfer (i.e., the investment expense of one firm is partially paid for by the other firm). In the absence of uncertainty, the ex ante transfer ensures that investment hold-up is fully eliminated. Our main result is that uncertainty introduces an inefficiency into the ex ante transfer bargaining game, which in turn causes an inefficiently long delay in investment. This linkage between higher uncertainty and longer inefficient investment delay has particular relevance for developing and transition economies where high uncertainty and weak contract enforcement is common.Risk and Uncertainty,

DUAL MARKETING AND THE DECISIONS FACING WESTERN CANADIAN FARMERS FOR WHEAT AND BARLEY MARKETING: A BRIEF TO THE WESTERN GRAIN MARKETING PANEL

Crop Production/Industries, Marketing,

AN ECONOMIC ANALYSIS OF PRODUCT QUALITY WITHIN THE CANADIAN CHEESE INDUSTRY

Food Consumption/Nutrition/Food Safety,

Efficiency of Farm Programs and Their Trade-Distorting Effects

Government intervention in product and factor markets generally leads to trade distortions. Conventional measures of government intervention, such as the Producer Subsidy Equivalent and the Nominal Rate of Protection, are often used to compare the effects of alternative policies on trade. This chapter demonstrates that the size of a trade distortion is often not closely linked to the level of producer support or protection but is closely related to a more fundamental variable—the economic efficiency of a government program. The trade-distorting policies can generally be ranked; the least efficient policies are the most trade distorting, and the most efficient policies are the least trade-distorting. An empirical examination of several important policies in Canada and the United States reveals that the efficiency criteria we propose can consistently rank policies according to their trade-distorting effects whereas more conventional measures, such as the Producer Subsidy Equivalent and Nominal Rate of Production, often fail to measure trade distortions