Efficient Income Redistribution for a Small Country Using Optimal Combined Instruments

In this paper I improve Gardner's surplus transformation curve framework by assuming that government is able to vary many policy instruments simultaneously instead of only one. I use my framework to find the combination of the currently used instruments which provides the most efficient income redistribution for the Austrian bread grains market. Contrasting the most efficient policy to the actual policy reveals that 464 million Austrian shillings were wasted. I theoretically compare for a small country the transfer efficiency of every possible pair of the four major agricultural policy instruments: floor price, production quota, coresponsibility levy, and deficiency payments. Without considering the marginal cost of public funds (MCF), deficiency payments cum quota (equal to a fully-decoupled direct income support) is the most efficient policy, succeeded by floor price cum quota, and floor price cum deficiency payments. If the MCF is taken into account, the ranking crucially depends on the market parameters, the transfer level, and the value of the MCF. For the Austrian bread grains market, I empirically demonstrate, that given the present support level, a fully-decoupled direct income support redistributes income most efficiently as long as the MCF is lower than 1.17. Beyond this value a floor price cum quota policy becomes more efficient. A floor price cum deficiency payments policy is never superior to the floor price cum quota.