Benefit-cost analysis: government compensation vs. consumer tax model

Abstract

Abstract:We provide a theoretical and empirical comparison of two historic production quota buyouts: the 2002 US Peanut Quota Buyout and the 2004 US Tobacco Quota Buyout. Producer compensation under the US Peanut Quota Buyout came from the treasury while the US Tobacco Buyout was paid for by a consumer tax (i.e., tobacco tax). Given these two buyouts, an important question arises: How does the method of compensation affect distribution and efficiency? Producers, consumers, and society favor a treasury buyout (TB) for several reasons. Producers are compensated considerably more under a TB, consumers are not burdened with the charge of funding the buyout, and society does not face additional efficiency losses due to the buyout.

The Not-So-Simple Economics of Production Quota Buyouts

“…An excise tax–funded buyout is depicted in Figure 1b, where S * is supply and D t is total demand (some parts of this section have been adapted from Schmitz, Schmitz, and Haynes [2012] and Schmitz, Haynes, and Schmitz [2013a, 2013b]). Under a quota arrangement, price is p ** and quantity is q **.…”

“…After years of debate and negotiation, the U.S. government terminated the tobacco quota program in 2004 (for detailed descriptions of the U.S. tobacco quota program buyout, see Dohlman, Foreman, and Da Pra, 2009; Schmitz, Haynes, and Schmitz, 2013a; Serletis and Fetzer, 2008; Womach, 2005). Generally, legislators from the U.S. tobacco states supported the termination of the tobacco program only if the tobacco quota owners were to be compensated.…”

“…Schmitz, Haynes, and Schmitz (2013a) analyzed the effects of the U.S. tobacco buyout within the context of the above-mentioned consumer tax theory. From Table 3, there is a calculated yearly benefit (gain in producer surplus) of $202 million and a yearly cost (loss in consumer surplus) of $293 million, with domestic and foreign consumers losing $162 million and $130 million, respectively.…”

“…Whereas previous empirical work (e.g., Schmitz, Haynes, and Schmitz, 2013a) focused only on a consumer tax-funded buyout, we presently consider the CMC processor tax. Without producer compensation, producers lose $413 million per year from the termination of the quota program, and CMCs gain $454 million per year (Table 4).…”

Alternative Approaches to Compensation and Producer Rights

“…We focus on the Ontario, Canada tobacco quota program that was part of the Canadian supply management system (for a historical development of Canadian supply management, see Schmitz et al ). The program was terminated in 2009, wherein producers were compensated CAD 286 million (CAD represents Canadian dollars) (Schmitz et al ). We show both theoretically and empirically, within an ex ante context, several approaches to compensation, including the one used in the actual buyout.…”