Abstract: We model and measure the effects of the Northeast Dairy Compact on prices, quantities, and producer and consumer welfare, underscoring the distribution of these effects across regions and among producer and buyers. Using 1999 as a base year, simulations show that the Compact raises the farm price of milk in the Northeast by $0.45/cwt., lowers the farm price of milk in the rest of the country by $0.02/cwt., and transfers income from producers outside the Compact region and buyers in the Compact region to producers in the Compact region. We find that non-Compact producer losses exceed Compact producer gains. Similar results are found for a scenario of Compact contagion— extension of the Compact to include additional states. In both cases, the Compact changes the distribution of the costs and benefits of price discrimination as practiced by milk marketing orders. We conclude that the regional distribution of the Compact’s welfare effects raises again the question of the organization of a government-sponsored milk marketing plan such as the FMMO system.

The Effect of the Northeast Dairy Compact on Producers and Consumers, with Implications of Compact Contagion (pdf)
Paper by Joseph V. Balagtas and Daniel A. Sumner. January 2002.