Gray, M. D.

University of Tennessee Agricultural Experiment Station

Whipple, G. D.

English

University of Tennessee, Knoxville: Trace

University of Tennessee, KnoxvilleTrace: Tennessee Research and CreativeExchangeResearch Reports AgResearch11-1983Welfare Effects of Lowered Dairy Price SupportLevelsUniversity of Tennessee Agricultural Experiment StationG. D. WhippleM. D. GrayFollow this and additional works at: http://trace.tennessee.edu/utk_agresreportPart of the Agriculture CommonsThe publications in this collection represent the historical publishing record of the UT Agricultural Experiment Station and do not necessarily reflectcurrent scientific knowledge or recommendations. Current information about UT Ag Research can be found at the UT Ag Research website.This Report is brought to you for free and open access by the AgResearch at Trace: Tennessee Research and Creative Exchange. It has been accepted forinclusion in Research Reports by an authorized administrator of Trace: Tennessee Research and Creative Exchange. For more information, pleasecontact trace@utk.edu.Recommended CitationUniversity of Tennessee Agricultural Experiment Station; Whipple, G. D.; and Gray, M. D., "Welfare Effects of Lowered Dairy PriceSupport Levels" (1983). Research Reports.http://trace.tennessee.edu/utk_agresreport/30University of TennesseeAgricultural Experiment StationEll 12'500004 84Welfare Effects ofLowered Dairy PriceSupport LevelsResearch Report 83-13 November, 1983G. D. Whipple and M. D. GrayOCT 11 1984 \U••IV. uF Ill"",Dept. of Ag. Economicsand Rural Sociology4p\\II1\!II'FIJF + ml,}SMPH r / " AR, (' l'1'~l(• 1'1: ,I' j) tL--L-1'~1 t- - - =, ==- - .....,. ~ =~ III! 1.1 I 1:W" , ••••••••••. 1'1'1DMQF cQF QMC QM QBC QB QQSFigure 1. Equi 1ibrium and \Velfnre Losses and Transfers of 3 Dai ry Market\<,Iith Classified Pricing, Pool ing, and Price Supports.8To measure the welfare impacts of the reduced support levels athree step analysis was used. 1) The economic surplus losses and trans-fers resulting from classified pricing, pooling and the price supportprogram were estimated from Model I competitive market estimates andModel II regulated market estimates at the observed level of pricesupport. 2) The surplus losses and transfers which would result fromclassified pricing and pooling but with lowered levels of support wereestimated from Model II, lowered support price estimates and competitivemarket simulation estimates. 3) The surplus loss and transfer estimatesof the observed and lowered support price situations were compared.The difference between the welfare effects of the two policy situationsprovides an estimate of the welfare effects of a lower~ support price.5ResultsThe reduction of the 1981 support level to $12.50 would have reducedprice support acquisitions by 40 percent (from 12,861 million lbs. to7,716 million lbs.) at long run equilibrium. Reduction to $12.00 wouldhave reduced price support acquisitions to zero in the long run. Thewelfare implications of lowering the price from its 1981 level of $12.95to $12.50 and to $12.00 are listed in Tables 1 and 2, respectively.These results indicate that both support price reductions would havedecreased the deadweight loss due to the supracompetitive pricing offluid milk (Figure 1, Area A) and the resource loss due to the over pro-duction of milk (Area C). The deadweight loss due to the subcompetitivepricing of manufactured milk products (Area B) would have increased whileTable 1. The Net Welfare Effects Associated with a Reduction of the Support Price from $12.95 to $12.50 Assumingthe Existence of the Federal and State Market Orders and the Price Support ProgramChange in Economic Surp1useChange of Net SurplusC DMilk aE F ProducersRegion A BFluidMilk bConsumerManufac-turingMilk cConsumerNetTotal dEffectsNortheast -1.878 -0.107Southeast -0.693 -0.104Lake States -0.670 -0.052Upper-Midwest -0.218 -0.084South Central -0.609 0.779Mountain-Southwest -0.241 0.006California-Nevada -0.615 0.065Northwest -0.185 0.009TOTAL -5.109 0.512-13.303 -55.243Millions of Dollars - - - --103.000-2.665 -36.515-5.746 -59.027 -34.587-0.925 -12.119-3.286 -38.635-1.300 -8.727-2.331 -3.005-0.414 -8.608-29.970 -59.027 -197.439aEquals the change in areas IE-(F+C)]bEquals the change in areas [-(E+A)].cEquals the change in areas [F-(B+D)].61.0658.59092.54762.5349.5643.87721.766-42.240-121.604-73.728-44.914-11.297-22 .450-18.124269.873 -437.34257.12137.22435.25712,33739.2458.9683.6208.793202.54861.172- - - - - - - - - -8.694151.62562.5938.7853.87121.6869.921328.344-16.293-3.477-66.279-1. 786-3.116-1.542-2.863-0.590-95.946dEquals producers' plus fluid and manufactured product consumers' net welfare for each region and the total U.S.eEconomic surplus areas correspond to like-labeled areas in Figure 1.Table 2. The Net Welfare Effect Associated with a Reduction of the Support Price from $12.95 to $12.00 Assumingthe Existence of the Federal and State Market Orders and the Price Support ProgramChange of Net SurplusManufac-Change in Economic Surplus e Fluid turing NetMilk Milk Milk Social dRegion Producer a b cA B C D E F Consumer Consumer Effects- - - - - Millions of Dollars - - - - ------ - - - - ------Northeast -4.030 0.907 -18.187 -131. 890 156.442 -270.145 136.010 155.485 -21. 350Southeast -1.501 0.048 -7.691 -87.636 21.388 -101. 333 89.134 21.340 -9.141Lake States -1. 263 0.777 -4.976 -77 .160 -82.803 151.027 -228.854 84.066 227.410 -83.622Upper-Midwest -0.399 1.008 1.123 -28.981 161.599 -191. 703 29.380 161.616 -0.707South Central -1.197 0.229 -6.337 -83.125 30.170 -106.958 84.322 29.607 -2.029Mountain-Southwest -0.516 0.095 -2.387 -20.838 10.720 -29.171 21.837 10.466 -2.649California-Nevada -1. 329 0.566 -4.271 -57.251 56.710 -109.690 58.580 56.012 -4.902Northwest -0.366 0.770 0.002 -20.595 24.471 -45.068 20.961 24.397 -0.290TOTAL -10.601 4.400 -42.724 -77 .160 -513.119 612.527 -1082.922 573.720 686.333 -124.690aEquals the change in areas [E-(F+c)).bEquals the change in areas [-(E+A)).cEquals the change in areas [F-(B+D)).dEquals producers' plus fluid and manufactured product consumers' net welfare for each region and the total U.S.11the resource loss due to government price support acquisitions (Area D)would have decreased with a reduced support price of $12.00 or $12.50.The analysis indicates that the $12.50 support price would resultin a $437.342 million loss in net economic surplus (Table 1) to u.s.milk producers while respective gains of $202.548 million and $328.344million would accrue to fluid and manufacturing milk consumers. Totalnet surplus, which represents the total deadweight loss due to regula-tion, would be reduced $95.946 million by a $12.50 support price. Asupport price of $12.00 would result in a $1,082.922 million loss ineconomic surplus to U.S. milk producers and gains of $523.720 millionand $686.333 million to fluid and manufacturing milk consumers, respec-tively. The net social cost of regulation would be reduced $124.690million (Table 2).The welfare implications of dairy market regulation (market ordersand price supports at observed 1981 levels) during 1981 are listed inTable 3.6 The reduction of the price support level to $12.00 wouldshift milk producers from a net economic surplus gain of $954.265 million(Table 3) to net surplus loss of $128.679 million ($1,082.922 millionchange, Table 2). Manufacturing milk consumers would shift from aposition of -$171.629 million net loss to a net gain of $514.136 million($686.333 million change). Fluid milk consumers' net surplus loss wouldbe substantially reduced. The total deadweight loss due to dairy regu-lation, listed as net total surplus, would shift from $146.380 millionloss to $21.690 million loss ($124.690 million change, Table 2). Similar.but smaller, changes would be induced by a $12.50 support price.Table 3. Welfare Implications Associated with Regulation of the U.S. Dairy Industry (Classified Pricing, Pooling,and Price Supports at the 1981 Observed Level).fEconomic Net Economic SurplusSurplus Hanufac-e Fluid turing TotalEconomic Surplus Losses Transferse Milk Milk Milk NetRegion A B C D E F Producers a Producer b Producer c Surplusd- - - - - - - - - - - - - - - - Millions of Dollars - - - - - - - - - - - - - - - - - - - -Northeast 6.765 0.115 21.790 321.500 -24.386 324.096 -328.265 24.501 -28.670Southeast 1.924 0.108 8.800 130.079 -2.402 123.681 -132.000 -2.510 -10.829Lake States 1.377 0.131 6.024 77.160 103.880 -48.593 146.449 -105.257 -125.884 -85.692Upper-Midwest 0.456 0.099 0.964 37.470 -22.775 59.281 -37.926 -22.849 -1.494South Central 1.765 0.005 8.144 115.215 -1.401 108.472 -116.980 -1.406 -9.914Mountain-Southwest 0.770 0.000 2.747 46.342 0.000 43.595 -47.112 0.000 -3.517California-Nevada 2.018 0.009 4.332 127.130 6.924 115.874 -129.148 6.933 -6.341Northwest 0.445 0.005 0.470 31.886 -1.407 32.823 -32.331 -1.412 -0.920TOTAL 15.520 0.192 53.271 77.160 913.346 -94.040 - 954.265 -929.016 -171. 629 146.380aEquals areas [E-(F+C)].bEquals areas [-(E+A)].cEquals areas [F-(B+D)].dEquals areas [A + B + C + D]. •.....N13ConclusionsThe simulation results listed in Table 3 indicate that milk pro-ducers gained economic surplus from dairy market regulation in 1981,while milk consumers suffered an economic surplus loss. The $.50 and$1.00 reductions in the support level would have reduced producers'economic surplus gain 48 percent and 113 percent, respectively. Infact, a $1.00 support level reduction would shift milk producers froma position of net economic surplus gain from dairy market regulation toone of net loss. Milk consumers would gain economic surplus from areduced support level. The Model II simulations indicate that reductionof the support level to $12.00 would have relieved the need for pricesupport acquisitions in 1981 at long run equilibrium. In the opinion ofthe authors, the supply response elasticity used in this study reflectsa time horizon of four or five years. Although shorter run equilibriumsolutions were not examined in this paper, it is certain that the responseof producers and consumers to changes in price would be more inelasticthan those reflected in the Model II solutions. Thus, over a shortertime horizon, a lowered support price would have less effect on the levelof price support acquisitions and on economic surplus shifts and lossesthan these results indicate.14Footnotes1. For an explanation of the workings of the classified pricing andpooling provisions of the federal market orders, see Hallberg and King.2. Area C is represented to reflect a minimum loss of resources. Itwould be larger if the next best alternative use of the additionalresources yielded a marginal revenue product below the competitivemilk price.3. Assumed for Area D is that price support acquisitions are consumedin the U.S. If some or all of the acquisitions were consumed inforeign markets, Area D would be larger, unless sales price exceededacquisition cost.4. Production and consumption data were collected from Milk Production2.3 percent, respectively. Prices and quantities for fluid andDisposition and Income, Ag Prices, and Federal Market Order Statistics.5. The Model II equilibrium solutions at the observed 1981 price supportlevel were compared with actual 1981 market characteristics to vali-date the basic simulation model. The regional prices and quantitiesof milk supply were misestimated most seriously at 1.7 percent andmanufactured milk demand were each misestimated by less than 1.0percent. These results suggest that Model II simulated the observedmarket characteristics satisfactorily.6. The estimation error resulting from using ordinary market demandcurves to measure areas of consumer surplus was calculated accordingto Willig's formula for Areas A, E, and F. For each of these areas-9the error was less than 1.0 X 10 percent viewed either regionallyor for the total U.S. This indicates that the error from usingordinary market demand curves is negligible.15ReferencesBlakely, L. V., and J. B. Riley. "Regional Gains and Losses for Con-sumers and Producers from Changes in Fluid Milk Prices." Southern}ourna-l_of Agricultural Economics 6(1974) :1-8.Buxton, B. H. and J. W. Hammond. "Social Cost of Alternative DairyPrice Support Levels." American Journal of Agricultural Economics56(1974):286-291.Currie, J. 1'1.,J. A. Murphy, and A. Schmitz. "The Concept of EconomicSurplus and Its Use in Economic Analysis." Economics Journal81(1971):741-799.Dahlgran, R. A. "Welfare Costs and Interregional Income Transfers Dueto Regulation of Dairy Harkets." American Journal of AgriculturalDahlgran, Roger A. "Welfare Losses and Interregional Transfers Due toRegulation of U.S. Dairy Markets." Ph.D. Thesis, North CarolinaState University, 1980bGeorge, P. S., and G. A. King. 1971. Consumer Demand for Food Com-Foundation. Monograph No. 26, California Agricultural ExperimentStation, Berkley.Hallberg, M. C., and R. F. Fallert. Policy Simulation Model for thePennsylvania State University, Bulletin No. 805, 1976.Hallberg, M. C., and R. A. King. l'_ricingof Milk and Dai~Jo~c~~_.Pennsylvania State University Agricultural Experiment Station,Agricultural Economics and Rural Sociology 150, June 1980.16Johnson, P. R. "The Social Cost of the Tobacco Program." Journal ofFarm Economics 47(1965):242-255.Seale, A. D., Jr., and T. E. Tramel. 1963. Reactive Programming MOdels,pp. 47-58. In R. A. King (ed.), Interregional Competition Research~ethods, Agricultural Policy Institute Series 10, North CarolinaState University, Raleigh.Wallace, 1. D. "Measures of Social Costs of Agricultural Programs,"Journal of Farm Economics 44(1962):580-594.\h11ig, R. D. "Consumer's Surplus Wi thout Apology," American EconomicReview 66(1976):589-597.U.S. Department of Agriculture. 1981. Agricultural Prices, AnnualSummary. Crop Reporting Board, Economics, Statistics and Coopera-tives Service. U.S. Government Printing Office, Washington, D.C.U.S.D.A. 1981. Milk: Production Disp~sition Income 1978-80, CropReporting Board, ESS, U.S. Government Printing Office, Washington,D.C.U.S.D.A. 1981. Federal Milk Order Ma_:rketStatistics, Annual Summaryfor 1978. Agricultural Marketing Service, Statistical BulletinNo. 625. U.S. Covernment Printing Office, Washington, D.C.u. S.D.A. 1981. Agri cu_~tural ~c;tatistj~~~,U. S. Governmen t Printing Office,Washington, D.C.

Welfare Effects of Lowered Dairy Price Support Levels

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Welfare Effects of Lowered Dairy Price Support Levels

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