Partial Market liberalization and the efficiency of policy reform: the case of the European dairy sector

This article analyzes the efficiency of partial market liberalization and policy reform with an applica-tion to the European dairy sector. In a second best world, partial moves toward market liberalization are not always efficiency improving. We develop a general equilibrium model to investigate the effi-ciency implications of discrete changes in government policy. The analysis covers price and quantity instruments used in both domestic and trade policy. We derive simple conditions under which partial market liberalization is efficiency improving. We apply the approach to agricultural policy reform in the European dairy sector and identify market liberalization scenarios that are “not ” efficiency improving. Key words: dairy, efficiency, European Union, market liberalization, policy reform. Government policy has major impacts on agri-cultural markets. For example, in the United States, Canada, and Europe, agricultural pol-icy has increased farm income through price support programs for grains and milk. Such policies are often complemented by import re-strictions and export subsidies. Canada and Europe have also implemented production quotas (e.g., in the dairy sector). As a re-sult, government pricing policy and trade pol-icy have distorted agricultural markets (e.g.