Income inequality and the distribution of the costs and benefits of agricultural support

Abstract

Agricultural production in the UK, as in most industrialised countries, has benefited from support for a considerable period of time. The method of support has changed from the operation of deficiency payments in the period leading up to the UK's accession to the European Community (EC), to the adoption of the Common Agricultural Policy (CAP) since 1973. A policy that supports one sector of the economy must involve costs to other sectors. In the case of agricultural support, it is usually the taxpayers or consumers (or both) who bear the costs. A considerable amount of work has been undertaken to measure the level of support received by farmers and the costs borne by the rest of society. However, this work has stopped short of a systematic analysis of the distribution of the benefits (costs) between farmers (households) at different income levels and the effect that this has on the level of income inequality within society. Analysis of the dairy sector highlights that support is cOncentrated on the higher income farms, although the level of inequality associated with the distribution of this support has not been altered by the UK's adoption of the CAP or by the subsequent introduction of milk quotas. A policy alternative, which restricts the quantity of production available for support, is analysed and is shown to reduce income inequality within the dairy sector. As for costs, the adoption of the CAP led to a dramatic equalisation in their distribution, thus increasing the burden of the lower income households. However, more recently the distribution of costs has remained fairly stable. More importantly, it is shown that agricultural policy increases income inequality for the UK as a whole.