While considerable debate may be generated about the need for government action, three
areas have been identified in the economics literature as potentially providing a justification for
policy measures that aid economic adjustment: 1. efficiency; 2. equity; and 3. political economy
(Richardson 1982). The efficiency argument centers on losses created when factors are
potentially mobile but market failure (due to imperfect information, incomplete markets or
imperfect competition) prevents their reallocation. Corrective action is justified if its costs are less
than the value of additional output generated by improved factor allocation. The equity argument
centers on compensation for private costs and redistributive effects when factor endowments
differ across individuals. Classical welfare economics suggests that society as a whole will
benefit from a policy change if gainers can potentially compensate losers and still be better off.
The political economy argument centers on the fact that losers may apply political pressure to
block change and that compensating payments may be needed to overcome their opposition. It
may be argued that all three of these areas apply to agriculture, and provide a justification for an
active approach to adjustment in the sector.