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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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Policy Implications and Conclusions

The discussion in the previous chapter highlighted the potential influence of government policy on asset values and asset mobility. The capitalization of government support into asset values reduces asset mobility, mainly because new entrants into the sector and existing farmers wishing to expand are faced with higher asset prices, the cost of which may not be recuperated in the future if farm returns (including support) are lower. In addition a number of other policies, mainly in the form of tax rules and other regulations, can also reduce asset mobility. This further enhances the capitalization phenomenon because, as seen in the theoretical discussion (Chapter 2), the least mobile assets are the ones most likely to be associated with the benefits of government support.

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