During such a period, excessive supply has to be eliminated and output price has to rise sufficiently to allow a fair return from farming without support. Once agricultural markets attain equilibria, it is desirable to minimize the use of revenue support programs. The excessive productive capacity of agriculture gives rise to policies that attempt to reduce it while serving other social objectives. Programs that restrict and control the use of exhaustible agricultural resources and agricultural pollution can serve this purpose. Some of these programs can be similar in structure to existing set-asides or conservation reserve programs, namely, farmers will be paid a certain amount for taking their land Ollt of production for a certain amount of time. One may envision programs of different clurations to allow policymakers more flexibility. One program may remove land from agricultural lise permanently while another may restrict production of certain crops for a shorr period of time. Currently, soil conservation is the main criterion for the selection of land to be removed from the production base. This has to be extencld to include other considerations. In situations where social prices for, say, water resource depletion, water quality contamination, and pesticide damnge have not been established, reduction or elimination of production for periods where the desired volume of output is low way serve as a useful second-best policy. The regulatory agency has to rank regions by severity of the environmental and resource degradation problems associated with their agricultural resources utilization and use it to identify conditions, priorities,flower harvest buckets and compensation schemes for removal of lands from production. Land retirement should not be the only mechanism to control land use.
Land-use controls that constrain the allowable crops and practices on certain lands can be used to control supply and address environmental problems. For example, certain tillage practices should be disallowed in locations with severe soil erosion problems. Production of crops that use certain chemical inputs intensively may be disallowed in certain regions with sensitive environmental conditions. Taxation or subsidization of input usage should be designed so that wedges between private and public costs of inputs should be reduced or even eliminated. For example, pesticides use fees should be set at levels that correspond to the environmental and health effects of the pesticides. Reduction or elimination of water price subsidies provides another means of reducing the wedge between private and private costs. There is a growing body of evidence that increase in water prices leads to adoption of efficient irrigation technology and water conservation . The use of monetary incentives for externalities and exhaustible resources control was shown to be most desirable in many circumstances . Buchanan and Tullock argued, however, that the use of taxes to control externality problems may be subject to much political opposition and require some transfers in return. Moreover, agricultural pollution taxation may require substantial monitoring efforts. Zilberman, Shah, and Chakravorty suggested using a pay schedule based on observable technology choices in cases where the actual externality or resource use levels are difficult to monitor. Thus, individuals who use technologies that are more environmentally sound will be subsidized by penalty monies collected from individuals who use less environmentally sound technologies. For example, in cases with excessive water use, users of furrow irrigation will be penalized while users of low energy precise application irrigation will be subsidized.
Preservation of rural commullities and traditions is an important policy objective that gives rise to policies that slow the introduction of supply-increasing technological change and presents criteria to r:tise the illcome of the farm sector without affecting supply. In essence, a well-preserved rural environment is a positive externality from a societal perspective. This positive externality will not be incorporated in market resource allocation and is the cause for government interventions. Such interventions may include subsidies of public goods and services in rural areas. The relatively small population base of many rural communities may make self-financing of public goods quite expensive, and the support of such institutions by the central government will improve the well-being and vitality of the rural sector. Another form of rural sector support is by subsidization of inputs such as electricity and energy. These policies, in essence, raise the well being of farmers and other rural residents but does not affect agricultural supply, and that is the beauty of this approach. Rural preservation consideration may result in policies limiting the size of farming operations and constrain the adoption of labor-replacing policies. Such policies are likely to reduce the productivity and the earnings of farmers and farm workers and may be accompanied by an income-support policy. Parallel to the introduction of these agricultural growth control policies, efforts should be made to promote tourism and similar sources of income that benefit from and can partially support the preservation of rural communities. Elimination of excessive productive capacity III agriculture is an important element in a transition to a more market-oriented farm sector. Thus, new policy regimes should consider programs that encourage the transition of resources from the agricultural to the non-agriclutural sector.
Such programs may include educational and training programs to endow the Inder employed rural population with marketable skills in the urban sector, placement programs to ease and facilitate transition of resources to locations where they Illay have a high return, and retirement programs that may accelerate retirement of marginal operations and assure removal of their resources from active production. One way to address the oversupply, low-return problems of agriculture is to institute programs that increase demand for agricultural products and increase the value added of agriculture and the share of agricultural production in the food bill. Marketing policies are intended to accomplish these tasks. One category of marketing policies includes advertising and the promotion of educational activities that attempt to increase demand-affecting preferences and knowledge of the consumers. A second category includes the establishment of product standards. Such standards reduce consumer uncertainty regarding quality and increase the choices available which, in rurn, is likely to increase demand. Establishment of quality standards is especially important in the context of international trade. Standards and product defini tions may vary across countries, but they have to be clearly defined and used to guide producers in exporting countries. The importance of research and extension activities in fostering changes in agriculture has been emphasized by Schultz , Cochrane , and Ruttan . Much of the agricultural research activities have been supported by the government, and the control of the extent ane! direction of public research provides the government with important policy instruments. Research and extension can be harnessed to address the excess supply problem by emphasizing efforts to introduce new uses for agricultural resources. These efforts may include development of new products as well as improvement in quality and characteristics of existing agricultural products. For example, by developing and introducing food products with specific health-enhancing characteristics ,round flower buckets agriculture can capture some of the public willingness to pay for health maintenance. An important part of the research and extension activities required for extending the range of products in agriculture is in marketing and demand. Improved information about consumers’ needs and preferences and more effective marketing channels will help to facilitate transformation of agricultural industries to new and profitable product lines. Agricultural research policies should not be limited to the finance and management of public research. They should provide the incentive for private research activities and encourage private investors to develop new uses to agricultural resources. A move to a more market-oriented agricultural sector, with lower support levels and a reduced supply level, will result in higher food prices that will affect the well being of consumers, particularly the poorer ones. This welfare reduction can be countered by consumer welfare support programs. They can be in forms of increased food aid programs or as direct income subsidies. Actually, an optimal consumer compensation may require a subsidy mix-some in the form of food stamps and some in the form of direct income. Food-stamp transfers, however, have the advantage of generating more demand for foodstuffs than the same amount of direct subsidy. here is a growing recognition that implementation plans should be incorporated explicitly to the design of new policy reginies.
The new economic models of information and regulation have argued that agency and moral hazard problems may lead to failure of otherwise very worthwhile policies. The performance of many agricultural and food policies have been plagued by such implementation problems in the past. For example. the problem of “slippage” that prevented past diversion policies from attaining expected reduction in supply was the result of eligibility criteria that did not recognize within-region heterogeneity of land quality and productivity. In particular, program yields have been established according to regional yield averages, rather than actual performance of individual farmers or plots. Furthermore, there has been no practical ways to prevent farmers from directing lands of lower quality while farming higher quality lands. Thus, one plausible reason for the enactment of these unsatisfactory eligibility criteria in the past has been the lack of mechanisms for monitoring and enforcement of more exact criteria .Monitoring capabilities are the key for the establishment of effective enforcement procedures, and these two elements determine legislator and regulator abilities to establish effective eligibility criteria. In designing new regulations, policymakers should recognize the limitations of their monitoring and enforcement abilities and the “moral hazard” problem these limitations may cause. Insurances, for example, have introduced deductibles in response to the moral hazard problems they face . Governments can induce such technologies by initiating research and development efforts to improve information networks, data gathering, and analysis techniques. As aerial surveillance capabilities improve, data processing costs decline, and the lise of computers and communication equipment becomes widespread, the ability to introduce more effective monitoring schemes increases; and improved monitoring Illay lead to improved implementation and more effective policies. Design of eligibility criteria should also take into consideration strategic behavior by farmers and other economic agents. Eckstein and others have found that farmers’ use take into account future benefits when they make their production and input use choices. Thus, farmers may modify their behavior to establish eligibility for future program benefits whenever possible. de Gorter and Fisher argued that this type of strategic behavior has been a significant contributor to the oversupply problem. Some farmers might have increased their acreage by cultivating marginal lands to increase their entitlement to future diversion programs and deficiency payments. Thus, whenever possible, eligibility criteria should be dependent on parameters that cannot be modified policy design and assessment should be done within a dynamic context. Dynamic processes and the resulting changes over time of key variables and parameters should be incorporated in policy modeling. For example, predicted values of changes over time in prices of inputs or outputs-as well as processes of learning, adoption. and technological changes-should be incorporated in policy models. Furthermore, efficiency assessment will compare expected net present values associated with alternative policies, and distributional analysis should predict streams of benefits and costs for individual groups. Emphasis on dynamic modeling is especially crucial, given the current dependency of agriculture on exhaustible resources and the excess supply problem that requires the design of a gradual adjustment mechanism that will lead to sustainable equilibria. To reduce uncertainty regarding government activities, policymakers should explicitly communicate the final targets 01 policy reform and the projected evolvement of policy parameters in attaining these targets. For example. if elimination of excess supply is one of the key objectives of the policy reform, policymakers should explicitly identify the length of the adjustment period and the planned policy interventions during this period. The uncertainty conditions under which policy design is conducted and the large number of random events which affect agriculture suggest that policy plans should have many contingencies and adjustment rules. The early phase of policy reform, when agricultural productive capacity is down scaled, should be designed for a most likely dynamic scenario; but it should include automatic adjustment rules to adjust to situations that deviate from the expected scenario. It is important to communicate the adjustment rules ahead of time and thus reduce the uncertainty of facing decision makers. Inconsistency and unpredictability of government policies in the past have made government actions another source of uncertainty. Well-specified adjustments may reduce this problem.