A stochastic welfare analysis of United States rice policy

The objective of this study is to analyze welfare consequences of rice policy in the United States within a stochastic framework. A general method of evaluating stochastic producer welfare is developed that is consistent with expected utility model of a competitive firm under price uncertainty. The new method is applicable to general risk preferences of producers and to general form of supply function. A rational expectations model of the U.S. rice market is developed that facilitates to analyze the effects of government programs in a market equilibrium context, to define a measure of price risk incorporating changes in market uncertainty as well as changes in government programs, and to define ex ante welfare measures. The market model is estimated using the annual market data during the period from 1976 to 1995.;The followings are important results of simulation on welfare consequences of government intervention. First, target price deficiency payment program may bring about a net gain in social welfare within a quite reasonable range of target price. Major sources of social welfare gains under target price program are the reduction of social costs associated with price risk, and the increase in consumers well-being at lower market price due to inelastic demand. Second, the 1996 FAIR Act would be more efficient than the 1990 Farm Bill in a sense that the aggregate social welfare could increase by amount of 17.1 million dollars in 1982--1984 constant prices. Third, it would be possible to identify an optimal policy setting such that setting target price at ;Methodologically this study suggests the relevance of the framework of stochastic welfare analysis, showing how government agricultural policies may improve economic welfare by reducing price risk faced by farmers. This study contributes to provide an empirical evidence on the magnitude of potential economic welfare gains of agricultural policies from reducing price risk inherent in agricultural markets.