Wheat Price Policy in Pakistan: A Welfare Economics Approach

Abstract

The production of wheat is vital to the economy of Pakistan; wheat accounts for over one-third of planted acreage, contributes roughly one-third of the agricultural sector's value added, and is the major staple in the nation's diet. The growth rate of wheat production in Pakistan over the past thirty years has been phenomenal: nearly five percent per year [Cornelisse and Kuijpers (1987)]. This outstanding performance in the growth of wheat output is remarkable considering that it has occurred in spite of government intervention that has reduced incentives to wheat production. Economists have devoted much time and effort to the analysis of the divergence between domestic and international prices for agricultural commodities. Wheat prices that prevail in world markets represent the opportunity cost of agricultural resources, reflecting the scarcity value of the inputs used in the production of wheat. Economic efficiency occurs when domestic prices for both producer and consumers equals world prices. Government intervention often occurs for reasons other than economic efficiency; governments may distort domestic agricultural prices to increase revenues, promote industrialisation, maintain low food prices for industrial workers or low-income consumers, or insulate domestic producers from fluctuations in world commodity market prices. Government intervention that maintains the domestic price of wheat at levels lower than the world price results in decreased output levels and higher rates of consumption than would occur in a free market, free trade regime. This form of price intervention results in a transfer of income from wheat producers to wheat consumers, efficiency losses that represent foregone opportunities for agricultural resources, and an increase in government expenditures.