How prices and macroeconomic policies affect agricultural supply and the environment

Abstract

The author studies the literature on how agricultural prices and macroeconomic policies affect agricultural supply and how that supply affects the environment. He addresses the question of how effective agricultural incentives are in boosting the agricultural supply, particularly in sub-Saharan Africa. The literature generalizes that farmers are rational. They increase their output in response to an increase in real output prices. The agricultural supply response is inelastic in the short run, but elasticities for individual crops are generally higher that those for aggregate output. Elasticities are higher in the long run that in the short. In theory, if farmers are rational, if output responds to price increases, measures should be taken to eliminate price distortion. There are four potential sources of bias in the estimates: a) disregard for the simultaneity of variables; b) the ommission of key variables; c) improper pooling of data from different countries; and d) in most time series studies, the aggregate supply response is treated as reversible, but, according to fixed assets theory, the supply response is irreversible. There is clearly a link between agricultural incentives and the environment. But quantitative data on relative aspects of the subject are very inadequate.Labor Policies,Economic Theory&Research,Environmental Economics&Policies,Markets and Market Access,Fiscal&Monetary Policy,Markets and Market Access,Agricultural Knowledge&Information Systems,Environmental Economics&Policies,Economic Theory&Research,Access to Markets