June 1977
Western J. Agr. Econ.
for a long time.4 Also, it could be argued that,
over the long run, displaced workers might recoup
a portion of their losses through cheaper food
prices. But even if technology adoption significant-
ly reduces the market price for the involved com-
modity, it is unlikely that the displaced workers
consume sufficient quantities of the single item to
reclaim a significant portion of their lost earnings.
Figure 2 utilizes a similar framework to evaluate
the efficiency and distributional implications of a
switch in agricultural technology caused by factor
price distortions. Isoquant ABCD represents the
set of technically efficient weed control systems
available. The capital∕labor social price ratio is
reflected by isocost line KsLs, which reveals System
C to be the most efficient from society’s per-
spective. Assume, however, that direct and indirect
government subsidies for capital inputs, including
herbicides and machinery, reduce the private price
of capita∣ by 50 percent, while the price of labor
remains constant. The capital axis in figure 2 is
scaled according to the social value of capital,
but the private price of a dollar’s worth of capital
has been reduced to fifty cents by the subsidy.
Consequently, the isocost line KpLp represents the
new lower capital∕labor price ratio confronting the
farmer, and motivates the adoption of Bas the least
cost technology. Evaluated by the social oppor-
tunity cost of the utilized resources (as indicated
by KgLs', which permits the purchase of Technology
B and is parallel to KsLs), the utilization of Tech-
nique B wastes (Kg -Ks) dollars per hectare. These
are the “efficiency losses” of Quadrant III in table
1. Adopting farms realize private production cost
savings of (Ls - Lp) x ₽l per hectare,5 but their
subsidized “modernization” has been costly indeed
to society. A switch to Technology B also displaces
labor from weed control, and runs the risk of im-
posing distributional losses on workers in the form
ofhigher unemployment and reduced earnings.
To briefly cite one example of the potential im-
pact of factor price distortions, preliminary results
from the coastal sugarcane zone of Pernambuco
state in Northeast Brazil indicate that the existing
combination of labor payroll taxes and indirect
subsidies for herbicides, which reduces the relevant
capital∕labor price ratio by about 50 percent, could
eventurally result in the privately profitable diffu-
4Employment adjustments may be particularly slow
for developing countries because they commonly import
herbicides and farm machinery, thereby Creatingfew new
jobs through linkages with the domestic industrial sector.
5As the price of labor (Pl) has remained constant, it
can be used as a numeraire in determining the value of the
two isocost lines, KsLs and KpLp, as perceived by the
farmer.
sion of herbicides over the entire region, displacing
over 90 percent of the labor previously engaged in
manual weeding. On the other hand, in the absence
of price distortions, it is unlikely herbicides would
be profitably adopted on more than one-third of
the regional production area.
The point that should be emphasized is that
when government price distortions underlie the
change in technology, there are no compensating
efficiency gains to balance against the welfare
losses of displaced workers. Unless there are
exceedingly important dynamic or other benefits
of a type not Considred here, which justify the
continuation of these price-distorting policies,
their continuation should be seriously questioned.
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