An Economic Analysis of the Special Milk Classes Scheme of Canada and the Agricultural Subsidy

We examine the effects of Canada's Special Milk Classes Scheme on resource allocation and discuss the rationale for average total cost of production as a measure of payments. Our simple model divides the total supply of fluid milk into two classes: one for domestic consumption and the other for export. First we show that the regulated high price of milk sold for domestic consumption does not yield cross subsidization if the processed milk for export is traded freely in the international market. In addition, the price of milk processed and sold for export may not be lower than the average total cost in some cases. It implies that the average total cost standard does not necessarily provide the proper measure of the subsidy.