Abstract
In this chapter, a completely original microeconomic model of the producer’s choice is presented. To capture the impact of agricultural policy on the agricultural producer’s income two main sources of income growth were included in the model, namely efficiency of production (economic rent) and funds obtained from solutions under the CAP agricultural policy (policy rent). In this chapter, the micro-level (plant, animal, and mix production types) and macro-level agricultural data were used. The agricultural producer optimises his choices, i.e. reaches equilibrium when it comes to these two sources of income for the objective function (income maximising). Therefore, the purpose of the article was to show a certain range of substitution between these sources of producer’s revenue. We have observed that the rate of substitution of these two sources of income growth is not equal to one, which means that replacing one with the other is not without any effect on the level of income. We find it important to assess not only the substitution between the two sources of income which are in our case production efficiency and political rent, but also to study to what extent investment decisions (which create a basis for future income) depend on political rent.
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- 1.
These concepts known in economics were introduced to agricultural economics by Wilkin (2005). In the article policy rent is understood as income effect of support for agricultural producers resulting from implementation of various programmes and mechanisms of the CAP. Due to the fact that our main focus is producer’s income, some impacts of agricultural policy (e.g. animal welfare policies and regulations) are not taken into consideration separately.
- 2.
We may refer this to the theory of rational expectations by Lucas and Sargent from the 1970s, who assumed that economic operators (producers and consumers) adapt flexibly, for their own economic benefit or maximisation of their own aim or function, to anticipated changes in regulations and economic policy.
- 3.
The models used in agriculture include, in particular, the indicators of labour productivity and productivity of the land. This is also the essence of the developed model in relation to agricultural production and agricultural producers. For a detailed explanation see, e.g. (Bezat-Jarzębowska et al. 2012).
- 4.
In the same way, we define the function of producer in mathematical economics.
- 5.
Cf. Sielska (2012, p. 28), where the decision problem of the agricultural producer is shown, using the multi-criterion approach, as a space of assessing decision options.
- 6.
Also in line with the aforementioned assumptions of the theory of rational expectations.
- 7.
Production efficiency is determined by a given production function for the agricultural producer (production technique): \( R_{t} = f(K_{t} ,L_{t} ) \).
- 8.
However, price relations are a surface source rather than a fundamental source of change in profitability—with given efficiency—and thus revenue.
- 9.
The agri-food sector is understood as a farm sector and processor sector.
- 10.
When we assume price volatility c = C R /C N (price scissors), this representation is expressed by the profitability index: \( {\text{OP}} = (C_{R}^{t} \cdot R_{t} - N_{t} \cdot C_{N}^{t} )_{R} \).
- 11.
This area is the topic of the work by Bezat and Rembisz (2011).
- 12.
Measuring TFP based on the grain industry in Bezat (2008).
- 13.
- 14.
Other indicators are: Market Price Support (MPS), which specifies the impact of price adjustment on the amount of retransfers to agricultural holding, Consumer Support Estimate (CSE), which characterises the costs incurred by consumers as a result of the support system used and consumer NPC presenting the relation between domestic price and international price, without the support system, paid by the consumer. The total size of the transfers is represented by Total Subside Estimate (TSE)—describing retransfers from consumers and producers adjusted by transfers of producers to the budget (including from taxes paid) (Czyżewski and Kułyk 2009).
- 15.
A more effective solution means achieving a certain level of income with lower effort.
- 16.
The direction of this substitution discussed on the basis of the above formula may go the other way round, i.e. growing income effects of improved efficiency replace the need for support of the agricultural policy. It seems, however, less likely.
- 17.
One needs to remark that data collected within the framework of the FADN includes only the farms with an economic size bigger than 2 ESU. European size unit, abbreviated as ESU, is a standard gross margin of EUR 1,200 (Eurostat 2012). Economic size thresholds applied by the Commission (in ESU) from year 2008 for Poland amounts to 2 ESU. European size unit, abbreviated as ESU, is a standard gross margin of EUR 1,200 (FADN 2012).
- 18.
We can probably assume that: kd Ep > kd B , where: kd EP —the cost of achieving income effects owing to economic rent, kd B —the cost of achieving income effects owing to policy rent. This, as we can assume, determines the direction of substitution in the scope of both types of rent analysed here. Policy rent somewhat supersedes economic rent, as it were. A wider analysis will be done on a separate occasion.
- 19.
In the long run producer’s income depends not only on labour input, but on capital input as well. Because of this fact in this part of the paper, we lift simplifying assumptions presented in formula (5.3).
- 20.
In the case of some decision-makers (households) “savings serve in part as a buffer against stochastic decreases in income” (Birdsall et al. 1996). When these precautionary motives for savings are concerned, decision-makers are less prone to undertake investments because of their irreversibility (Pender and Fafchamps 1997).
- 21.
FADN database contains variables related to the demographical characteristics of an agricultural household that may help explain investment behaviour, but in our opinion they should not be treated like a complete set of information explaining investment decisions.
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Acknowledgments
This publication was prepared in the Independent Laboratory of Mathematics Application in Agricultural Economics (Institute of Agricultural and Food Economics, National Research Institute) as a contribution to the research conducted within the Multi-Annual Programme 2011–2014 “competitiveness of the Polish food economy in conditions of globalization and European integration”.
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Bezat-Jarzębowska, A., Rembisz, W., Sielska, A. (2014). Developing of Modelling Tool for Policy and Economic Rent in Agriculture. In: Zopounidis, C., Kalogeras, N., Mattas, K., van Dijk, G., Baourakis, G. (eds) Agricultural Cooperative Management and Policy. Cooperative Management. Springer, Cham. https://doi.org/10.1007/978-3-319-06635-6_5
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