Distributional Effects of Crop Insurance Subsidies

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Abstract

This article investigates the distributional effects of the subsidized crop insurance program in the United States. An equilibrium displacement model is constructed, linking the supply of disaggregate farm commodities with final consumer food demands. Using state-specific data on farm commodity production, crop insurance payments, food expenditures, and federal tax payments, the welfare effects of the removal of the premium subsidies for crop insurance are calculated for each state in the United States. Results indicate that the removal of the premium subsidy for crop insurance would have resulted in aggregate net economic benefits of $622, $932, and $522 million in 2012, 2013, and 2014, respectively. The deadweight loss amounts to about 9.6%, 14.4%, and 8.0% of the total crop insurance subsides paid to agricultural producers in 2012, 2013, and 2014, respectively. In aggregate, removal of the premium subsidy for crop insurance reduces farm producer surplus and consumer surplus, with taxpayers being the only aggregate beneficiary. The findings reveal that the costs of such farm policies are often hidden from food consumers in the form of a higher tax burden. On a disaggregate level, there is significant variation in effects of removal of the premium subsidy for crop insurance across states. Agricultural producers in several Western states, such as California, Oregon, and Washington, are projected to benefit from the removal of the premium subsides for crop insurance, whereas producers in the Plains States, such as North Dakota, South Dakota, and Kansas, are projected to be the biggest losers.

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