Analysis of Social Welfare Effects of Crop Revenue Insurance

Abstract

This study examines the need to introduce crop revenue insurance through analyzing its social welfare effects for the five target crops of the 2013 tabletop exercise. Based on the 5,000 simulated crop prices and revenues, producer welfare and consumer surplus resulting from the introduction of revenue insurance were estimated for each of the five crops. In addition, the cost-benefit of introducing revenue insurance was analyzed and compared with that of operating current crop yield insurance from the standpoint of the country as a whole. We found that the increase in producer and consumer welfare due to subscribing revenue insurance is 5.9 billion won and 3.0 billion won, respectively, for the five crops in total. The results of cost-benefit analysis show that net benefit of introducing revenue insurance is estimated to increase by 5.1 billion won, which is 3.4 billion won more than the net benefit increase of 1.7 billion won which could be attained through the implementation of current crop yield insurance. Although revenue insurance has many benefits, it needs to be dealt with carefully through considering various operating issues such as finding of additional data, complex evaluation of loss, and prevention of moral hazard.