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NASJONALT FORSKNINGSINSTITUTT med regional forankring og internasjonal relevans 

International Trade in Agricultural Products

Economic Aspects of Exposure to Risk for Infections

This report studies welfare and policy aspects of exposure to risk for infections and diseases related to increased imports of agricultural products to Norway. With no market failures, an importing country will have gains from trade whenever the price of imported goods is below the domestic market price. However, the expected costs associated with such a risk for imported infections and diseases constitutes a negative externality. This calls for a corrective tax on the imported goods, i.e., a tariff. The use of the price mechanism alone is in most cases not the most efficient policy. Control measures may be employed to reduce the risk of importing infected goods. The gains from a reduction in the risk, must be balanced against the control costs. Unless the marginal cost of control is an increasing function of the number of controlled units, it is better to control all imported units than to control only a share of the imported goods. The first best optimal import policy requires a combination of control measures and a tariff. With control measures in place, the optimal tariff includes the cost associated with the remaining risk after control plus the control costs. Thus the price of the imported goods should include both the marginal control costs and the expected marginal costs associated with the after-control risk. Then, the resulting import volume will maximise the gains from trade. Such a trade optimum involves a trade off between gains (reduced domestic price, increase in consumer surplus) and costs (expected cost of infections/diseases, control costs). This applies if we assume risk neutrality. With risk aversion, a risk premium must be added to the expected marginal external cost in order to sustain the efficient import volume.