Efficiency and regulation: a comparison of dairy farms in Ontario and New York State

We study the cost efficiency of dairy farms operating under two different regulatory regimes. While neo-classical economic theory suggests that farms should maximize their efficiency regardless of their regulatory system, we find that farms operating in a more regulated environment have, on average, a lower cost efficiency. Differences in cost efficiency are primarily explained by allocative decisions—farms in the more regulated environment are overcapitalized and overly reliant on homegrown feed. Efficiency is estimated using bootstrapped data envelopment analysis and a stochastic distance function. We discuss the implications of these results for welfare and policy.