THE NOT-SO-SIMPLE ECONOMICS OF PRODUCTION QUOTA BUYOUTS

This article updates and expands the literature on the impact of production quotas. Unlike many of the early studies, our focus is largely on the removal of production quota programs. We study cases wherein production quota programs have been eliminated and quota owners were compensated for their losses. Specifically, we examine (1) production quotas in both the absence and presence of trade, (2) production quota buyouts (three case studies), (3) sources of funding, and (4) general equilibrium considerations. A fifth section briefly discusses externalities, the interpretation of consumer surplus measures, and the nature of conducting economic analyses of addictive goods.

Benefit-cost analysis: government compensation vs. consumer tax model

We provide a theoretical and empirical comparison of two historic production quota buyouts: the 2002 US Peanut Quota Buyout and the 2004 US Tobacco Quota Buyout. Producer compensation under the US Peanut Quota Buyout came from the treasury while the US Tobacco Buyout was paid for by a consumer tax (i.e., tobacco tax). Given these two buyouts, an important question arises: How does the method of compensation affect distribution and efficiency? Producers, consumers, and society favor a treasury buyout (TB) for several reasons. Producers are compensated considerably more under a TB, consumers are not burdened with the charge of funding the buyout, and society does not face additional efficiency losses due to the buyout.