Rural/Urban Effects of Terminating Farm Subsidies

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Abstract
A rural‐urban interregional computable general equilibrium (CGE) model is constructed to simulate the effects of terminating farm subsidies on household incomes, employment rates, farm and non‐farm sectoral activity, regional costs of living, and other economic indicators. The magnitudes of the effects depend on regional factor and goods market segmentation. Robust short‐run implications are that ceasing farm subsidies would cause rural nonfarm (particularly household service sector) employment to fall and lead to lower household income. On the other hand, rural manufacturing activity expands and the cost of living falls relative to urban. Urban employment, household income, and land rents rise. Although termination of farm subsidies causes a decline in rural real product, the urban real product gain outweighs rural losses.

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