By Alex Chernoff, Senior Economist at the Bank of Canada
At the 2016 Canadian Economic Association meetings, Alex Chernoff received the 2015 Robert Mundell Prize for his work on dairy quotas and price regulation. Alex was a Queen’s doctoral candidate and JDI Student Fellow at the time; Dr. Chernoff is now a Senior Economist at the Bank of Canada. Here, he summarizes his contribution. Note that the views in this paper are those of the author and do not necessarily reflect those of the Bank of Canada.
“Between a cap and a higher price: Modeling the price of dairy quotas under price ceiling legislation”
The system of supply management in the Canadian dairy sector requires that farmers hold quotas to produce milk. In Canada’s two largest dairy producing provinces, Quebec and Ontario, ceilings on the price of quotas have been in effect since 2007 and 2009 respectively. Previous research established that the use of quota price ceilings create a source of inefficiency in the Canadian dairy sector.
My paper estimates the empirical implications of various policy alternatives to price ceiling legislation. I determine the magnitude of the decrease in the farm price of milk that would be required to reduce the valuation of Quebec dairy quotas to the current price ceiling of $25,000 per unit. Accomplishing this task requires modeling the implicit valuation of quotas during the price ceiling era. Starting from a dynamic model of the demand for quotas, I develop an econometric model and estimate a structural parameter that is required for the counterfactual policy experiments.
Using my econometric results and the modeled equilibrium price, I estimate the price of dairy quotas over the period 1993-2011. I estimate that dairy quotas in Quebec in 2011 would have traded at a price of $29,923 in the absence of the price ceiling. The counterfactual experiments indicate that the price of quotas could be reduced to the ceiling price level through a 4.16% expansion of the aggregate supply of quotas, or through moderate trade liberalization of Canadian dairy products.