Wheat Price Policy in Pakistan: A Welfare EconomicsApproach

The production of wheat is vital to the economy of Pakistan;wheat accounts for over one-third of planted acreage, contributesroughly one-third of the agricultural sector’s value added, and is themajor staple in the nation’s diet. The growth rate of wheat productionin Pakistan over the past thirty years has been phenomenal: nearly fivepercent per year [Cornelisse and Kuijpers (1987)]. This outstandingperformance in the growth of wheat output is remarkable considering thatit has occurred in spite of government intervention that has reducedincentives to wheat production. Economists have devoted much time andeffort to the analysis of the divergence between domestic andinternational prices for agricultural commodities. Wheat prices thatprevail in world markets represent the opportunity cost of agriculturalresources, reflecting the scarcity value of the inputs used in theproduction of wheat. Economic efficiency occurs when domestic prices forboth producer and consumers equals world prices. Government interventionoften occurs for reasons other than economic efficiency; governments maydistort domestic agricultural prices to increase revenues, promoteindustrialisation, maintain low food prices for industrial workers orlow-income consumers, or insulate domestic producers from fluctuationsin world commodity market prices. Government intervention that maintainsthe domestic price of wheat at levels lower than the world price resultsin decreased output levels and higher rates of consumption than wouldoccur in a free market, free trade regime. This form of priceintervention results in a transfer of income from wheat producers towheat consumers, efficiency losses that represent foregone opportunitiesfor agricultural resources, and an increase in governmentexpenditures.