Alternative Approaches to Compensation and Producer Rights

Abstract

When policies are changed, it is not uncommon for losers to be compensated. Economic theory and quantitative analysis are useful in determining the efficiency gains/losses associated with a policy change, but are little help in deciding what the approach to compensation should be. The amount of compensation varies, depending on, in part, the political clout of the parties being negatively affected by a policy change—compensation is what politicians and the sector demanding compensation can agree on. We formulate four approaches to producer compensation within the context of the Ontario Tobacco Transition Program, where producers would have suffered losses in the absence of compensation. The approaches range from providing zero compensation to providing compensation based on the entire value of the tobacco quota. The Canadian government chose the latter and compensated producers for the termination of the tobacco quota program based on an approach that far exceeded other possible compensation approaches.

Agriculture in the United States, Mexico, Canada Agreement: Agreeing to keep things pretty much the same

“…Academic agricultural economists provide little help as there is no agreement on the methodology to be used to determine compensation. While compensation in the case of concessions given in trade agreements has received less attention, the compensation that might be required from the abandonment of the supply management policy has received considerable attention, but with little consensus on methods or results—examples include Barichello, Cranfield, and Meilke (); Busby and Schwanen (), Grant, Barichello, Liew, and Gill (); Nogueira, Barichello, Baylis, and Chouinard (); Schmitz and Schmitz (); Schmitz, Haynes, and Schmitz (); Schmitz, Haynes, and Schmitz (); Van Kooten (); and Vercammen and Schmitz (). Given the complexity of the Canadian dairy market under supply management, determining the appropriate compensation is challenging as it deals with future counterfactuals, future income streams, appropriate discount rates, the post change equilibrium, and, in the case of concessions arising from trade agreements establishing the ceteris paribus conditions so that the changes that can be attributed to the concessions can be isolated from those arising from other factors over lengthy phase in periods.…”

The Not-So-Simple Economics of Production Quota Buyouts

“…When a production quota program is eliminated, the government typically determines (1) whether to compensate (“buyout”) quota owners for the loss of the quota, (2) the amount of the compensation package (or the approach to compensation [Schmitz and Schmitz, 2011; Schmitz, Haynes, and Schmitz, 2015]), and (3) the source of any potential funding. We focus on two sources of funding for a production quota buyout: revenue raised from general taxation or litigation (within the context of the U.S. peanut buyout and the Ontario tobacco buyout, respectively) and revenue raised from an excise tax (within the context of the U.S. tobacco buyout).…”

“…Similar to the United States, the Great Depression had ravaged the Canadian agricultural industry, and the OFCTMA was put in place to control prices and conditions of sale. It was not until 1957, however, that a true supply management program was established under the Ontario Flue-Cured Tobacco Growers’ Marketing Board (OFCTGMB) (for details on the function of the OFCTGMB, see Elgin County, 2013; Schmitz et al, 2015; Schmitz, Haynes, and Schmitz, 2015).…”

“…Importantly, even though production declined (along with the TMQ) from a peak of 238 million pounds in 1974 to an all-time low of 22 million pounds in 2009 (Figure 5), the BPQ remained at roughly 271 million pounds over the same time period (OFCTGMB, 2009) 6 Figure 5.Ontario Marketed Flue-Cured Production and Prices, 1957–2012 (source: Schmitz, Haynes, and Schmitz, 2015)…”

“…Ontario Marketed Flue-Cured Production and Prices, 1957–2012 (source: Schmitz, Haynes, and Schmitz, 2015)…”