The Taxation and Pricing of Agricultural and Industrial Goods in Developing Economies

Abstract

This chapter presents an analysis of pricing (and taxation) of agricultural and industrial goods in LDCs. We identify and explain the central tradeoffs involved in changing prices, in reforming prices, and in setting optimal prices. Our analysis is based on a general equilibrium model of a dual (agricultural-industrial) economy in which there is a multitude of goods and income groups in each sector. We present a number of results on price reforms and optimal pricing. For instance, we show how Pareto improving price reforms (which do not hurt anyone in the society, and make the society better off) can be conducted for cash crops and production inputs, based on extremely limited information. Our analysis also leads us to argue that there is a case against taxing some cash crops or agricultural inputs, while subsidizing others, no matter what the society's aversion to inequality is.

Our framework of analysis is not only consistent with a variety of alternative institutional features of LDCs, but it also shows that these features have a marked influence on what the prices should be. An understanding of these influences is important because there is enormous diversity among LDCs in their institutional structures, and in the set of policy instruments they can use. For the same reason, some of the basic prescriptions of the standard tax theory (which is based on special assumptions reflecting the structure of developed economies) turn out to be misleading in the context of LDCs. We also discuss in this chapter some of the issues of political economy from which the standard tax theory has abstracted but which, we believe, may be central in the analysis of taxation and pricing policies.