Deregulation of the Norwegian market for dairy products

The Norwegian dairy policy is based on price discrimination. Monopoly profit is passed on to the farmers by raising the average price of milk. This procedure increases milk production, and involves cross-subsidization. Using a numerical model of the Norwegian agricultural sector we show that substantial efficiency gains may be achieved by deregulating the dairy sector, mainly due to the elimination of exports. It is estimated that a transition to cost based pricing may increase the economic surplus by 2.6 billion NOK, which is 22% of value added in agriculture.