Disequilibrium effects from misallocated markets: An application to agriculture

Prices and the allocation of resources are essential components of efficient markets. Yet due to market failures or other imperfections, observed prices, and the allocation of resources can diverge from socially optimum equilibria, misinforming private and public decision making and distorting welfare. In this study, we present a two‐step framework for valuing market inefficiencies and the foregone monetary value from disequilibrium. Specifically, we measure the degree that observed prices and quantities diverge from equilibrium and capture this divergence in terms of foregone revenue impacts. Empirically, we illustrate this framework using Indian agricultural data, where we estimate that on average and over the study period this particular market has been underpriced and overproduced compared to the estimated efficient equilibrium. The potential additional gains in value to Indian agriculture from correcting this market disequilibrium ranges from $11 billion USD to $75 billion USD depending on the degree of disequilibrium and the adjustment level.