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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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Theoretical Foundations for Asset Capitalisation

It is recognised that agricultural support can affect farmland markets. Understanding the mechanism through which these affects are felt is the first step in explaining and predicting the impacts of agricultural policies on land use and prices, determining who benefits and who loses from support policies and all the other information that good policy making requires. This section identifies the main assumptions and economic variables behind that mechanism according to economic theory.

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