Friday, May 15, 2009

Free Farmland!

As I was digging out some articles from my move to Iowa City, I came across a story that Zambia offered commercial farmers free farmland to grow crops such as corn and roses in an effort to reduce the nations dependence on commodities such as copper and colbalt. This is an interesting subsidy in the sense that it gives incentives to farm some 200,000 hectares of Zambian farmland that was not being used to typically white farmers from Zimbabwe (or elsewhere).

As an economist, my first reaction is to balk at such as subsidy program, especially since the subsidy is on land, which may be the good that is least distortive to tax (a la Henry George and Milton Friedman). So the one good that is least distortive to tax is being subsidized - hence my initial reaction. Yet, just because the government is giving the land for free - think back to US history of western expansion and settlement - this may not be as welfare decreasing when looked at from the nations perspective.

Since the land is already there, the government is not incurring any additional production costs from providing the land for farming, so from the government's perspective the marginal cost of land is basically zero. Yet the opportunity cost of having a valuable resource not efficiently utilized is positive - i.e. forgone property tax revenue and income tax revenue from the farm and the employees. Thus, while the land has positive value, the subsidy loss (but not a cash flow cost to citizens of Zambia) could actually be a welfare gain, which is why I think this may be an interesting subsidy.

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