US Cattle Farms, Externalities and Subsidies : A Computable Two-sector Markov-Perfect Equilibrium Model

The US livestock industry benefits from direct and indirect subsidies at the expense of the environment, public health, and animal welfare. These subsidies result in artificially low meat prices and increased consumption, and create hurdles to fair competition between large and small livestock farmers, and their plant-based counterparts. In this study, we develop a computable Markov perfect partial-equilibrium model of US cattle farms, where farmers are allowed to enter, exit, and grow in size, and to choose between two production techniques: responsible farming (e.g., cow-calf farming from cradle to slaughterhouses without confinement) vs irresponsible farming (e.g., farmers utilizing large scale confined feeding operations). Using this model, we endogenously analyze the impacts of direct and indirect subsidies on equilibrium prices and output, and the resulting market shares of responsible and irresponsible farms. Our results reveal that introducing policies designed to, in some way, `tax' the livestock industry's environmental and public health externalities, as well as imposing minimum space requirement or civil enforcement type policies, can be highly effective in reducing the adverse impacts of CAFOs, and can favor smaller, more responsible farmers