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Dairy cows at a farm in southwestern Ontario. In order to sell their output, dairy farmers must first obtain a permit to do so, and dairy quotas are not cheap: more than $25,000 per cow. (Steve Jenkinson for The Globe and Mail)
Dairy cows at a farm in southwestern Ontario. In order to sell their output, dairy farmers must first obtain a permit to do so, and dairy quotas are not cheap: more than $25,000 per cow. (Steve Jenkinson for The Globe and Mail)

ECONOMY LAB

Ending supply management a foul, difficult process Add to ...

The best way to get a rise out of Canadian economists is to ask us about our dairy supply management system. It’s simply indefensible: a government-enforced cartel whose only purpose is to generate high prices for what most would view as essential goods. This sort of arrangement wouldn’t be -- and isn’t -- tolerated in another sector of the economy. Nor is it tolerated anywhere else in the world. So the news that the federal government is considering putting supply management on the table in order to join the Trans-Pacific Partnership trade deal is guaranteed to generate a certain amount of excitement among my colleagues.

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It’s hard to believe that the interests of 13,000 Canadian dairy farmers could consistently trump the interests of 34 million Canadian dairy consumers, but yet the system is still with us. Why can’t we simply end supply management and let consumers benefit from lower dairy prices?



The problem is that current dairy farmers are -- for the most part -- not earning monopoly rents from what they produce. In order to sell their output, dairy farmers must first obtain a permit to do so, and dairy quotas are not cheap: more than $25,000 per cow. To a very great extent, the higher prices that they receive simply cover this initial investment.



So the real winners from supply management are those who received the initial quotas 40 years ago, and they are beyond the reach of policy: those initial quotas have long been sold and resold. The ideal solution to the problem would be to invent a time machine, go back to the 1970s, and tell policy makers what a terrible mistake they were about to make.



Sadly, this is not possible. So how can we reduce dairy prices without ruining present-day dairy farmers who bought their quotas in good faith? One option -- as described in this CD Howe proposal -- would be to slowly increase the number of quotas over a long period of time, so that they gradually lose their value. When they are essentially worthless, there would be little loss in abolishing them.



But as University of Canterbury economist Eric Crampton notes, this sort of strategy is not likely to put us on the fast track for trade negotiations. So the only way out of the trap that was set for us 40 years ago may be for the federal government to simply buy up the quotas at their current market price. As Crampton points out, “[t]is will not be cheap”; he proposes a temporary tax on dairy products that would be cancelled when the costs of buying out the quotas have been recovered. But since this tax would be applied to both domestic and imported dairy products, it would provide the level playing field required of the TPP.



This doesn’t sound like a quick fix, and it isn’t. But it may be the least-bad of the options that are available to us.



Stephen Gordon's recent posts and Twitterfeed can be viewed here.



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