The Effect of Supply Management on Herd Size in Alberta Dairy

Abstract

Abstract A supply management program limits the aggregate supply of a commodity, often through the use of marketable quota licenses. The static, aggregate welfare effects of supply controls are well known, but the farm‐level, dynamic effects on dairy investment are not. A theoretical cost‐of‐adjustment model is used to show that supply management reduces the rate of quasi‐fixed input adjustment at the farm level. In fact, when a quasi‐fixed input is complementary to quota licenses, investment or disinvestment can be impaired to such an extent that the input moves away from the long‐run equilibrium. As a result, overinvestment in this input can significantly reduce productivity growth.

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