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, aggregate 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 the rate of quasi-fixed input adjustment at the farm level. In fact, when a quasi-fixed input is complementary to quota licenses, investment or disinvestment can be impaired to such an extent that the input moves away from the long-run equilibrium. As a result, overinvestment in this input can significantly reduce productivity growth.