AGRICULTURAL PRICING AND PUBLIC-INVESTMENT

Aggregate agricultural supply is price inelastic, but responsive to investment in agricultural infrastructure (irrigation, roads, research, extension). Thus, the government should tax agriculture and finance infrastructure. Although unlikely to pay for itself directly, it will increase taxable agricultural surplus, but by raising rural living standards, and therefore the supply price of urban labour, it reduces urban tax revenue. Its marginal social product is therefore overstated when measured at world prices, though understated at distorted agricultural prices. With scale economies in industry, the case for taxing and investing in agriculture is strengthened. It may allow the economy to escape stagnation.