Agricultural subsidy with capacity constraints and demand elasticity

Abstract

Agricultural subsidy has attracted more and more attention. This paper captures the effects of subsidy (including area subsidy and price subsidy) on the total sown areas of crops based on the assumption that subsidy has both stimulating effects and inhibiting effects. Different from the prior studies, this paper considers the impacts of the farmland constraint and demand elasticity and some interesting conclusions are achieved. Firstly, a stimulating effect increases crop sown areas while an inhibiting effect reduces them. Secondly, the output efficiency of farmland as well as the demand elasticity has a major impact on the government subsidy. Besides, the capacity constraint makes thing difference and the government should choose between the areas subsidy and price subsidy under different conditions. Finally, this paper offers an empirical test on the conclusions by adopting the Chinese agricultural statistical data.