An Economic Analysis of Agricultural Support Prices in Developing Economies
42 Pages Posted: 24 Jan 2018 Last revised: 30 Jan 2019
Date Written: 2019
Several developing countries have adopted the Guaranteed Support Price (GSP) scheme to support their farmers and underprivileged population. Through this scheme, the government, operating under a budget, procures a crop from farmers at a guaranteed (and attractive) price, announced ahead of the selling season, and then distributes the procured amount to the underprivileged segment of the population at a subsidized price. The goal of this scheme is twofold: (a) as a supply-side incentive, to ensure high output from the farmers, and (b) as a demand-side provisioning tool, to subsidize the consumption needs of the poor.
In this paper, we offer analytically-supported insights on several fundamental aspects of the GSP scheme by analyzing a Stackelberg game between a homogenous population of small farmers and a social planner. We explicitly model the strategic behavior of the farmers and the consuming population, characterize the equilibrium market outcome (i.e., the production decisions of the farmers and their selling decisions to the government and in the open market, the consumption decisions by the strategic Above-Poverty-Line (APL) and Below-Poverty-Line (BPL) consumers), the resulting equilibrium welfare of each segment, and compare them with that under two benchmarks: (a) the absence of any intervention, and (b) the Direct Benefit Transfer scheme, where the social planner simply distributes the budget among the BPL consumers. We find that two key economic forces – the poorness of the BPL consumers (a demand-side force), and yield uncertainty (a supply-side force) – act as impediments to high production by farmers and consumption by the BPL consumers. Seemingly disparate and acting on different segments of the population, the complex interactions of these forces leads to an interesting analysis. If the poorness of the BPL consumers is extreme, then the GSP scheme improves the production by the farmers and consumption by the BPL consumers, and leads to an increase in the social planner’s surplus. If yield uncertainty is dominant, then the social planner can use the GSP scheme as a mechanism to divide his budget in any proportion to improve the surplus of the BPL consumers and the farmers; the desired split is achieved by setting an appropriate support price. We also discuss an extension where the social planner weighs the surplus of the BPL consumers and the farmers more than the APL consumers and the unused budget.
Keywords: Support Prices, Production and Selling Decisions, Yield Uncertainty
JEL Classification: C72, D40, L11, L22
Suggested Citation: Suggested Citation