THE EFFECT OF SUPPLY MANAGEMENT ON HERD SIZE IN ALBERTA DAIRY

A supply management program limits the aggregate supply of a commodity , often through the use of marketable quota licenses. The static, aggr egate welfare effects of supply controls are well known, but the farm- level, dynamic effects on dairy investment are not. A theoretical cost -of-adjustment model is used to show that supply management reduces th e rate of quasi-fixed input adjustment at the farm level. In fact, whe n a quasi-fixed input is complementary to quota licenses, investment o r disinvestment can be impaired to such an extent that the input moves away from the long-run equilibrium. As a result, overinvestment in th is input can significantly reduce productivity growth.