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Welfare Effects of Wheat Pricing Policy

To protect Producers of agricultural products, particularly strategic products, various measures have been employed in the last tow decades. In order to maintain terms of trade in agricultur sector, pricing policy on the basis of real production costs in a typical utility unit has been one of the measures that government had to fulfil. By using the time series statistics of 1971-1998, the effect of wheat pricing policy, as a strategic product, on producers, consumers and government is studied. The obtained results say the supply elasticity of product relative to price and cultivation area have been 0.17 and 1.85 relatively, and wheat demand price elasticity-0.013. The results of this study demonstrate that the guaranteed price, set by the government, had been 26 percent lower than the market equilibrium Price. This resulted in Rials 1930 Billion loss for wheat producers and Rials 8300 Billion profit for consumers. The amount of Rials 136 Billion extra cost was borne by the government (inefficiency cost) for its intervention in the wheat market.