Economics tobacco quota

1. Initially, tobacco quota was assigned to specific acres of land. To produce tobacco, a
farmer had to buy or rent the land associated with the quota.
a) Explain how this program design will affect rental rates and use figure1to il-lustrate the effect on farmland rental rates of linking quota with specific land.
b)Nearly all of the tobacco quota is owned by non-farmers. In other words, to-bacco growers rent the tobacco quota from non-farmers. In light of this fact and
your analysis in question1aabove, how well does the tobacco quota program
achieve its goal of increasing farmers’ income? Explain.
Cartel
2. Tobacco farmers effectively formed a cartel by convincing the government to enforce
a production quota.
a) Before lobbying Congress for the supply control, the Tobacco Growers Associa-tion had to determine the optimal quota level they would ask for. Use figure2to
illustrate the production quantity that the Tobacco Growers Association would
most prefer. On the graph, label the rents associated with this quantity. (For
this question, assume the U.S. tobacco market is in autarky—in other words,
assume there is no international trade in tobacco for this question.)
Production quotas in a large open economy
3. The U.S. is, of course, a large open economy. The graphs in figure3represent the
U.S. market for tobacco (panel3a) and international tobacco trade (panel3b). Using
these two graphs to do the following:
a) Illustrate the effects of U.S. tobacco production quotas with no barriers to trade.
The quota quantity is labelled in the figure as
Q. Label quantities, world price,
imports and/or exports.
b)Use table1to analyze the welfare effects of this policy. Explain any deadweight
in terms of foregone market transactions.
c) How effective would the tobacco quota be at supporting farmers’ income in this
scenario? Explain.
Prof. Barrett Kirwan / ACE 456 / Spring 2015 3
An import quotaanda production quota
4. Use the graphs in figure4—which, again, represent the U.S. market for tobacco (panel4a)
and international tobacco trade (panel4b)—to do the following:
a) Illustrate the effect of an import quota that will be used to protect the U.S. to-bacco quota system. Label quantities, world price, imports and/or exports.
b)Use table2to analyze the welfare effects of this policy. Explain any deadweight
in terms of foregone market transactions.
c) How effective would the tobacco quota be at supporting farmers’ income in this
scenario? Explain.
What if export subsidies had been used instead?
5. Use figure5to do the following:
a) Illustrate an export subsidy in this market (without production quotas or import
quotas). Label quantities, world price, imports and/or exports.
b)Use table3to analyze the welfare effects of this policy. Explain any deadweight
in terms of foregone market transactions.
c) Is this an effective way to support farmers’ income? Explain.

Part II. The Tobacco Buyout

Motivation
“The Tobacco Transition Act of 2004 ended a 66-year-old federal farm program and re-placed it with…nothing. The Transition Act, also known as the tobacco quota buyout, was
a rapid and complete market liberalization: from one growing season to the next, U.S. to-bacco production went from a policy environment of severe restrictions on production to
a free market regime. Such a large and seemingly permanent policy change provides an
opportunity to study the full effects of distortionary economic policy.” (Kirwan, Uchida,
and White2010)
This quote is taken from a paper I recently wrote. Using similar data, this question asks
you to use a difference-in-differences analysis to evaluate the effect of the tobacco buyout
on farm profitability.
Prof. Barrett Kirwan / ACE 456 / Spring 2015 4
Background
Under the federal tobacco program, the USDA annually set an aggregate limit on virtually
all domestic tobacco production and supported the prices received by U.S. tobacco growers.
Initially, quota was assigned to specific acres. By the 1990’s, however, quota could be leased
separately from the acreage, but it could not be sold or leased across county lines. These and
other restrictions of the quota program limited growers’ ability to efficiently allocate land
and other resources for tobacco production. The quotas were a source of economic rents for
quota owners, but they were also a major expense for growers, many of whom leased some if
not all of their quota. Economic theory predicts that removing the restrictions imposed by
the quota program frees farmers to allocate resources to crop production more efficiently.
To what extent has reallocation occurred? To what extent did reallocation of resources
contribute to profitability and production growth the buyout? These are the questions this
exercise will answer.

Criteria

To successfully complete this exercise and get full points you will need to:
1. accurately use Excel,
2. report all of the results,
3. Use full sentences when explaining and interpreting the regression results,
4. explain what each statistic represents as well as interpret the specific estimate value,
5. explain whether the estimates “make sense” to you and why,
6. explain any surprises or uncertainties you encounter.
You must do more than simply follow the directions; you will need to also synthesize infor-mation from class and the readings with the information and data provided here.

Difference-in-differences
1. Download the dataset KYmidCounty.xls from the Compass.
2. The data in this section of the exam comes from the Census of Agriculture. The Cen-sus of Agriculture occurs every 5 years. Since the policy change happened in 2004,
we will use data from the 2002 Census of Agriculture for our “pre-policy-change”
Prof. Barrett Kirwan / ACE 456 / Spring 2015 5
Variable mean median std dev min max
netReturns
total_revenue
total_expenditures
v_own
v_machines
a_total
q_labhired2
q_tractor_all
a_otherhay
a_corn
v_grains_oilseed
v_lvstk
v_othercrophay
op1_age
op1_daysofffarm
information, and we will use data from the 2007 Census of Agriculture for our “post-policy-change” information. It has data for every county in Kentucky, where the ma-jority of burley tobacco is grown. For each county, the dataset contains information
on two types of farms,(1) farms that grew tobacco in 2002, and(2) farms that did
not grow tobacco in 2002. Since the policy change only affected tobacco producers,
farms that grew tobacco in 2002 will be the “treatment” group. Farms that did not
grow tobacco in 2002 are the “control” group.
The dataset contains information on the average production in the county for each
group. In this difference-in-differences analysis we will look at five outcome variables:
revenue, expenditures, net returns (aka profits), corn production, and land value.
3. Createfour tables of summary statistics, one for each group*time for the variables
listed below. Include the mean, median, standard deviation, min and max. For ex-ample, your table should look something like this:
4. Box plotscan be used to look at the distribution of a variable across different cate-gories. For example, box plots can be used to compare the distribution of men’s shoe
Prof. Barrett Kirwan / ACE 456 / Spring 2015 6
sizes with the distribution of women’s shoe sizes. In this problem, create box plots to
compare the change in total revenue, total expenditures, net returns, acres of corn,
and land values between treatment farms and control farms.
5. Estimate the effects of removing the tobacco quota by doing the following:
a) Use the averages you computed in Getting to Know the Data2to fill in a simple
4×4 diff-in-diffs table like the ones we covered in class. Create one table for each
outcome variable (total revenue, total expenditures, net returns, acres of corn,
and land value).
b)Calculate the difference-in-differences estimate for each table.
c) Report the effect the policy change had on total revenue, total expenditures, net
returns, corn acreage, and land value.
d)According to the diff-in-diffs method, what would tobacco farmers’ profits have
been in 2007 if the tobacco program hadn’t ended?

References

Kirwan, Barrett E., S. Uchida, and T. Kirk White. 2010. “Aggregate and Farm-level Pro-ductivity Growth in Tobacco: Before and After the Quota Buyout.”American Journal of Agricultural Economics94, no. 2007 (May): 838–853.

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