Milk Quota Systems: Considerations of Market and Welfare Effects

Although the key concept of a quota is simple – to set a limit on production – the market and welfare implications of operating a quota system are relatively complex. The purpose of the analysis reported in this paper is to address two aspects relevant to an evaluation of quota systems. First, quota is typically contingent on the existence of another policy, namely market price support, and as such, interacts with other policy tools in pursuing defined policy objectives. The paper examines analytically and empirically the trade-offs that exist among the individual policy tools for a given policy objective. Second, the paper discusses some important welfare effects of quota systems that are not often considered in the literature. It illustrates that if parts of the primary factors of production are not owned by the milk farmer and prices for purchase farm inputs are not perfectly elastic the conventionally used measure of producer surplus may understate net benefits to farmers of a quota system. Under the quota, the share of benefits flowing to owners of farm resources is magnified at the expense of input suppliers and the rent accruing to quota reduces the surplus accruing to traditional resources. A fact that aggravates the vested interests inherent to a quota.