Supplementing farm price policy by direct income payments: Cost-benefit-analysis of alternative farm policies with a special application to German agriculture

Increasing problems of EEC farm price policy in balancing allocative and distributive objectives have evoked much criticism and several suggestions for alternative policies. In this paper a proposal gradually to complement price policy by direct income payments to farmers is made. Methodological problems of estimating the economic effects of such a policy shift are discussed. Results of an empirical study for German agriculture are presented. Political problems of implementing this policy are considered. The paper is based on a study prepared for the German Ministry for Agriculture. From the methodological point of view the emphasis is on specific problems of applying cost-benefit-methods to farm price policy. The need for multidimensional objective functions, definition of a reference system, dynamic analysis and consideration of market distortions are stressed. The empirical study shows positive potential benefits of a reduction in price support for a fairly wide range of circumstances.