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The Simple Analytics of Transferable Production Quota: Implications for the Marginal Cost of Ontario Milk Production

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  • Kevin Chen
  • Karl Meilke

Abstract

Using the fact that separate markets exist for used and unused quota, this paper derives a formula to compute the marginal cost of the milk production using a competitive dynamic optimization model. It is showed that, under a perfect competitive quota market, the difference between unused quota and used quota prices gives an exact measure of rental value of quota and thus marginal cost. Policy risk is showed to have no effect on the calculation of equilibrium rental value of quota. The formula is modified to allow for the presence of a transfer assessment. It is showed that the effect of transfer assessment on the calculation of equilibrium rental value of quota depends on the elasticities of demand and supply for quota as well as the level of the transfer assessment. Using empirically estimated elasticities of demand and supply for quota, above modified formula is applied to compute the marginal costs of Ontario milk production over the period 1980/81 to 1994/95. While it represents an improvement over Barichello's approach, the measured marginal costs are not totally satisfactory. The problem lies in the fact that the monthly rental rates are unstable both within the dairy year and across the time series. The results here suggest that one must be cautious in the use of the difference between unused and used quota prices as a measure of rental rate.
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Suggested Citation

  • Kevin Chen & Karl Meilke, 1998. "The Simple Analytics of Transferable Production Quota: Implications for the Marginal Cost of Ontario Milk Production," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 46(1), pages 37-52, March.
    • Handle: RePEc:bla:canjag:v:46:y:1998:i:1:p:37-52
    DOI: j.1744-7976.1998.tb00080.x
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    Cited by:

    1. Brennan A. McLachlan & G. Cornelis van Kooten, 2022. "Reforming Canada's dairy supply management scheme and the consequences for international trade," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 70(1), pages 21-39, March.
    2. Elskamp, Rebecca & Hailu, Getu, 2013. "Do Efficient Dairy Producers Purchase Quota?," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149678, Agricultural and Applied Economics Association.
    3. Daniel A. Sumner & Norbert L. W. Wilson, 2005. "Capitalization of Farm Policy Benefits and the Rate of Return to Policy-Created Assets: Evidence from California Dairy Quota," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 27(2), pages 245-258.
    4. Richard R. Barichello & James Vercammen & Benjamin Zammit‐Maempel, 2024. "Are milk quota prices a rational investment? Modeling quotas as financial assets," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 72(3), pages 251-269, September.
    5. Wilson, Norbert L.W. & Sumner, Daniel A., 2004. "Explaining Variations in the Price of Dairy Quota: Flow Returns, Liquidity, Quota Characteristics, and Policy Risk," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(1), pages 1-16, April.
    6. Chen, Kevin Z. & Weerahewa, Jeevika, 1998. "Regulation, Market Power, And Advertising Effectiveness," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 27(2), pages 1-9, October.
    7. Calum Turvey & Alfons Weersink & Craig Martin, 2003. "The Value of Dairy Quota under a Commercial Export Milk Program," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 51(1), pages 69-83, March.
    8. Skully, David W., 1999. "The Economics Of Trq Administration," Working Papers 14584, International Agricultural Trade Research Consortium.
    9. Meilke, Karl D. & Sarker, Rakhal & Le Roy, Danny G., 1996. "Analyzing The Potential For Increased Trade In Dairy Products: A Canadian Perspective," Proceedings of the 2nd Agricultural and Food Policy Systems Information Workshop, 1996: Understanding Canada\United States Dairy Disputes 16959, Farm Foundation, Agricultural and Food Policy Systems Information Workshops.
    10. Skully, David W., 2001. "Economics of Tariff-Rate Quota Administration," Technical Bulletins 184332, United States Department of Agriculture, Economic Research Service.
    11. Meilke, Karl D. & Lariviere, Sylvain & Martin, Craig, 2001. "Trade Liberalization in the Dairy Sector: An Overview," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 2(1), pages 1-28.
    12. Alex W. Chernoff, 2015. "Between a cap and a higher price: Modelling the price of dairy quotas under price ceiling legislation," Canadian Journal of Economics, Canadian Economics Association, vol. 48(4), pages 1403-1429, November.
    13. Doyon, Maurice & Brodeur, Catherine & Gervais, Jean-Philippe, 2006. "Imputing Dairy Producers' Quota Discount Rate Using the Individual Export Milk Program in Quebec," CAFRI: Current Agriculture, Food and Resource Issues, Canadian Agricultural Economics Society, issue 7, pages 1-11, November.
    14. G. Cornelis van Kooten, 2020. "Reforming Canada's Dairy Sector: USMCA and the Issue of Compensation," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 42(3), pages 542-558, September.

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