Policy Brief: The Cost of Implementing Agricultural Policy

Agricultural policies, like all government policy, incur transaction costs – the cost of designing, implementing and evaluating the measure involved. Making this process more efficient and reducing these costs can help ensure that governments are getting the best value for money in implementing these policies.

Analysts have long considered transaction costs when trying to make social, environmental and development assistance policies more efficient and effective. More recently, the concept has been applied to the transaction costs of agricultural policies – in other words, the costs over and above the price support and budget transfers actually received by farmers.

There are two key issues when looking at the role of policy-related transaction costs in agricultural policy. The first is the need to identify, track and reduce policy-related transaction costs; the second is the impact of these transaction costs on policy choice when governments are looking for the most efficient and cost-effective option to achieve a given objective.

In agricultural policy the debate often revolves around the choice between broad policies such as price support or area payments that benefit all farmers, and more targeted measures that aim for specific results in areas such as biodiversity or landscape. Differences in policy-related transaction costs are only one of a wide range of costs and benefits that need to be taken into account when making that choice. Targeted interventions are often more efficient, because of the savings from targeting. Targeted interventions are only less efficient when the market failure that is being targeted occurs very widely, and/or the policy-related transaction costs are extremely high. If the problem being tackled relates to farmers’ income then the costs of delivering support are never so high as to justify an untargeted measure.

This Policy Brief examines policy-related transaction costs (PRTCs) and their role in improving the efficiency of agricultural policy.