Abstract
Abstract In this paper prices for leasing milk quota in England and Wales are estimated using traditional and ‘modern’ microeconomic theory of firms’ costs. In both cases it is argued that the distinction between short‐run and long‐run is relevant in establishing quota prices. Estimates of marginal cost are derived by econometric methods and by direct use of observed costs, after which it is a straightforward exercise to obtain estimates of quota values at farm level and equilibrium quota prices for the industry. Results from the empirical analysis justify choice of the efficiency criterion, whereby quota is transferred from high‐cost to low‐cost producers, as a suitable basis for establishing a leasing price. Whilst higher milk prices are shown to have been the principal cause of increases in the nominal price of quota, reductions in input prices dominate when these increases are measured in real terms. As for choice of cost function, the use of constant marginal cost, associated with ‘modern’ microeconomic theory, provides some credible estimates.
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