Producer's surplus and rents in the U.S. dairy industry

Abstract

The term "producer's surplus" is commonly used in the economics literature to refer to gains from trade to the suppliers of a particular good. While common, the term has been applied ambiguously and seldom is defined in a consistent manner. This study provides a consistent and workable definition of the term "producer's surplus." In the short-run, producer's surplus is the sum of profit and quasi-rent that belongs to the firm or factor owners, or both, depending on the contract. In the long-run, it is a measure of the rents to specialized factors used in the production of the industry output, and is captured by the owners of the specialized factors. An application, using the long run concept of producer's surplus, is provided. Rents in the U.S. dairy industry during 1950-1989 are estimated, and specialized factors receiving these rents identified. The estimated rents, in constant 1967 dollars, ranged from 2285.1 million in 1952 to 1596.6 million in 1988. Two empirical models are constructed to test the relationship between the estimated rents and possible specialized factors in the dairy industry: land and dairy cows. The empirical results support the hypothesis that dairy cows are a specialized factor in the dairy industry, but reject a significant relationship for land. It is also shown that, in the dairy industry, rent dissipation through competition in the political market and inventive activity are relatively insignificant.