Milked and Feathered: The Regressive Welfare Effects of Canada's Supply Management Regime

Abstract

The production and trade of dairy and poultry products in Canada are controlled by a system of supply management (SM). Output is regulated with production quotas, and imports are restricted through a system of tariff-rate quotas. Many of Canada's trading partners are seeking better access to Canadian dairy and poultry markets in negotiations over proposed preferential trade agreements. These pressures have renewed debate about the future of SM in Canada. We investigate one criticism of SM: that high prices for dairy and poultry products impose regressive distributional effects on Canadian consumers. We apply the Exact Affine Stone Index demand model to data from the Canadian Food Expenditure Survey to estimate consumer responses to price changes for dairy and poultry products. Parameters from the demand model are used to generate welfare comparisons between the current SM regime and a counterfactual liberalized market. Canada's SM policies are highly regressive, imposing a burden of approximately 2.3 percent ($339) of income per year on the poorest households, compared to 0.5 percent ($554) for the richest households. The burden is larger for households with children.