Quota Prices as Indicators of Comparative Advantage in Supply Managed Industries

The Canadian Farm Products Agencies Act (2012) requires that comparative advantage be used to guide the allocation of new quota under supply management. This requirement, however, has not been met in practice. Agricultural economists have proposed several ways of making this legal requirement operational. We review and evaluate these proposed approaches and find that quota prices are the only direct measure of comparative advantage in supply managed industries. We develop an agent-based general equilibrium model of quota exchange to illustrate the use of quota prices as indicators of comparative advantage. Our approach complements the proposal by Meilke (2009) to use quota prices as indicators of comparative advantage in supply managed industries and also addresses the concerns of Larue and Gervais (2008) that quota prices may not be theoretically consistent with comparative advantage. We also discuss potential practical challenges of using quota prices as indicators of comparative advantage in the Canadian supply managed industries. Finally, we provide an example of calculating provincial shares of new quota using recent quota price data according to two prototype decision rules.