Gains from Trade, Inefficiency of Government Programs, and the Net Economic Effects of Trading

Abstract

A great deal has been written on the inefficiencies of government farm programs and associated welfare effects (e.g., Just, Hueth, and Schmitz 1982; Gardner 1983, 1987; Schmitz, Sigurdson, and Doering 1986; Schmitz 1988). However, common measures of inefficiency and distributional impact have not addressed the following question: How are gains from trade and the inefficiencies of government programs related? From a policy perspective, knowing the trade impacts of government programs is at least as important as knowing the inefficiency effects. For example, is it possible for gains from trade to outweigh farm program inefficiencies? Alternatively, could it be that negative trade impacts combined with farm program inefficiencies create situations in which no trade would be preferred to trade under existing government policy distortions? In this paper we establish the link between classic ‘‘gains from trade’’ and the inefficiency of distortionary government programs. Using this framework, we show both theoretically and empirically that the net economic effects of trading can be negative (i.e., no trade would be preferred to trade under distortions). We show that