Cross-Subsidization Due to Infra-marginal Support in Agriculture: A General Theory and Empirical Evidence

Posted: 29 Jan 2008

See all articles by Harry de Gorter

Harry de Gorter

Cornell University - School of Applied Economics and Management

David R. Just

Cornell University - Dyson School of Applied Economics and Management

Jaclyn D. Kropp

University of Florida

Abstract

A general theory of cross-subsidization due to infra-marginal support is developed. Two sources of output distortion are identified: exit deterrence and extra-marginal output. Some firms would not be in business without the subsidy. Cost savings due to declining average costs are always greater than the losses incurred where price equals marginal cost. Moreover, it is theoretically possible for infra-marginal subsidies to expand output more than equivalent fully coupled subsidies. Empirical analysis of U.S. dairy subsidies isolates these components of cross-subsidization and finds distortions from infra-marginal support to be substantial, with implications for trade negotiations, dispute settlement, and policy formulation.

Suggested Citation

de Gorter, Harry and Just, David R. and Kropp, Jaclyn D., Cross-Subsidization Due to Infra-marginal Support in Agriculture: A General Theory and Empirical Evidence. American Journal of Agricultural Economics, Vol. 90, No. 1, pp. 42-54, February 2008. Available at SSRN: https://ssrn.com/abstract=1087623 or http://dx.doi.org/10.1111/j.1467-8276.2007.01044.x

Harry De Gorter (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States
607-255-8076 (Phone)

David R. Just

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States
607-255-2086 (Phone)
607-255-9984 (Fax)

Jaclyn D. Kropp

University of Florida

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