Review of Main Methodological Approaches Quantifying the Economic Effects of the European Milk Quota Scheme

Abstract

This report is based on the outcome of a study carried out by the European Commission's Joint Research Centre - Institute for Prospective Technological Studies (JRC-IPTS, Spain) in cooperation with EuroCARE (Bonn, Germany) and the collaboration of the Agricultural Economics Research Institute (LEI, the Netherlands) and the Catholic University of the Sacred Heart (Unicatt, Italy). The report provides a review the most recent studies modelling the European milk quota. The focus is on milk quota rents, which are a central element in carrying out impact analyses on dairy policies. Direct approaches to estimating milk quota rents are the only option for providing empirically gained estimates to be used in equilibrium models. From the reviewed empirical estimates, it appears that differences in magnitude and rankings are present across the considered studies. This poses serious problems when these estimates are used for calibration, because equilibrium models are highly sensitive to the assumptions made on quota rents. Another difficulty lies in the choice of the length of run used when calibrating. As previously mentioned, equilibrium models are sensitive to the assumptions made on quota rents and different lengths of run may lead to different policy conclusions. Given that the micro-econometric estimation of milk quota rents seems to be an ongoing issue and its translation for equilibrium models far from being settled, it is advisable to perform sensitivity analysis using, whenever possible, different sets of estimates in order to assess the robustness of policy analysis.