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Agricultural Support, Farm Land Values and Sectoral Adjustment

The Implications for Policy Reform

image of Agricultural Support, Farm Land Values and Sectoral Adjustment

Governments intervene in the agricultural sector through policies that both support and shape agricultural production. This leads to two important outcomes. First, agriculture specific programmes intended to increase the welfare of farmers can become capitalised into asset values. Second, many policies, in particular regulatory ones, reduce asset mobility, resulting in reduced economic efficiency due a sub-optimal allocation of resources. This study focuses on the capitalisation of government support into land rents and prices. It assesses the consequences of inflated asset values, and suggests lessons for future policy making.

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Land prices, Empirical Evidence and Literature Review

The general theoretical framework for the capitalisation of agricultural support into the production factor land has been developed in Chapter 2. This chapter reviews the extensive empirical literature on this topic; it summarizes what we know about the size of the impact of agricultural policies on land rentals and land prices. The empirical literature confirms that we know relatively well the impact of polices on land rentals, but we know less about the working of land markets and the formation of land transaction prices. The consensus emerging from the empirical literature is that government policies can indeed affect rentals through the capitalisation phenomenon. In addition, the land rent has a positive relation with the transaction price of land, but it is only one of its many possible explanatory factors.

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