Question

explain why the change is or is not likely to be a Pareto improvement:Replacing the system of agricultural price supports with a system of income supplements for poor farmers.

Answer 1

In the last two years, fixing the minimum support price (MSP) to deliver remunerative prices to farmers has been at the forefront of the debate on the farm crisis. There have been numerous reports about the crash in market prices in this period, particularly after demonetization in November 2016. The Union finance minister finally announced in the budget speech for 2018-19 that the government will fix MSP at 50% over the cost. On 4 July, the government fulfilled its promise.

It has become clear now that it has not considered imputed rental value of land and interest on own capital invested by the farmer in calculating farmer cost (C2). The MSPs announced for kharif 2018 provide a return of 50% over paid out cost of inputs, interest on borrowed capital and family labour (A2+FL). Moreover, while declaring the MSP, the government has not considered other relevant factors, such as domestic demand, global prices, export competitiveness and ecological sustainability of crops such as paddy. The relevance of an expert body like the Commission for Agricultural Costs and Prices (CACP) is also in question as the MSPs have been fixed through a static formula. In the long run, it is not a desirable policy option.

The change might be a Pareto improvement, as the income that will be taken from the taxes paid by the creamy layer will be a loss for them but a gain for framers who will get assistance financially and on a large view will be able to increase the overall economic efficiency.