Economic Concepts for Agricultural Policy Analysis

Abstract

We need to have some understanding of basic and essential theoretical aspects of agricultural policy analysis before we discuss analytical tools. This chapter outlines a methodology for conducting a policy analysis and then introduces concepts and models important to measuring the impact of trade and domestic policies that directly affect prices, quantities and societal welfare. The concepts of consumers’ surplus and producers’ surplus are introduced and developed from the viewpoint of measurement in a graphical analysis. The concept of Pareto optimality is introduced in the context of general equilibrium analysis and also to highlight the distinctions between first-best and second-best policy situations. The two fundamental models of economic analysis—the partial equilibrium model and the general equilibrium model—are introduced. These are at the heart of the analytical methods used in price policy analysis. We also introduce here the theory of second best, which provides some guidelines for choosing among alternative policies. The chapter concludes with the application of the concepts in partial equilibrium analysis of selected domestic and trade agricultural policies in small country and large country settings.