The costs of the CAP Economics of Food Markets Lecture 16 Alan Matthews

Lecture objectives To highlight the uneven impact of CAP costs and benefits across EU member states To understand how this arises because of the common financing of the CAP To discuss the benefits of the CAP for Ireland

Source: Zanias 2003 Who benefits from the CAP?

Why the issue arises Financial solidarity – one of the three principles of the CAP –Budget costs of the CAP financed in common by the FEOGA Guarantee budget –Consumer costs of the CAP paid by EU consumers, not only by domestic consumers The budget effect The preferential trade effect

P Q DS PwPw P eu abc d e Intra-EU exports Extra-EU exports Trade transferBudget transfer

Implications for CAP reform Note that the uneven incidence of CAP costs and benefits complicates the process of CAP reform –Net beneficiaries want to hold on to benefits, and vice versa McSharry reform transferred resources from countries with large (food) consumption share to countries with large budget share Luxembourg Agreement simply copperfastened the existing distribution of payments –Even modulated payments must be largely spent in the country from which they originate

Distribution of direct payments by member state

Empirical studies Importance of the counterfactual –Is policy change renationalisation of agricultural policy or move to free trade? Problems in measuring the preferential trade effect –Make use of OECD Producer Support Estimate figures Zanias study based on following equation Note that this study is based on measuring transfers, not the real income cost of the CAP

Distribution of direct payments between farmers

Reading Zanias Commission 1994 Baldwin 2005