Optimal agricultural policy and pse measurement: An assessment and application to Norway

Among the general public the producer support estimate calculated by the OECD is widely viewed to be an indicator of distortions created by agricultural policies. When considering conventional agricultural policy grounded on production subsidies, the relative (percentage) PSE and inefficiencies are indeed highly correlated. However, we demonstrate that this is not necessarily the case if policy is targeted to correcting externalities associated with agricultural activity. In particular, a welfare-enhancing reform involving a shift from production subsidies to payments for the supply of public goods may result in a lower absolute PSE and lower trade distortions, but a higher relative PSE.