Efficiency impacts of Government policy on agricultural production in the presence of externalities

Government intervention can create or enhance private incentives for farmers to produce certain crops at the expense of others. It may also induce allocative inefficiency. However, when externalities exist, or when market failures prevent the production system from achieving its best allocative efficiency, Government intervention may not be as undesirable as it is usually thought. This paper develops a modified policy analysis matrix, PAM, and uses the Thai agricultural diversification programme to demonstrate that Government policy to encourage more production of legume crops at the expense of rice is not as undesirable as it is criticized by some economists when water charging and environmental cost are considered.