Economic and Social Cost of Fertilizer Subsidy on Paddy Farming in Sri Lanka

Abstract

The main objective of this paper is to examine the effectiveness of fertilizer subsidy on paddy cultivation. ANCOVA model was fitted in order to accomplish this objective. Accordingly, it was found that there is a statistically significant positive relationship between fertilizer subsidy and average yield of paddy farming. Marginal Analysis was employed in order to assess the efficiency of fertilizer usage. According to the analysis, private benefits of fertilizer usage are higher than private cost; hence, fertilizer usage is inefficient; more precisely fertilizer is underutilized. On the contrary, as evidence shows social cost of fertilizer usage is higher than social benefits; fertilizer usage is inefficient but over utilized. Hence, appropriate measures should be taken up in order to reduce fertilizer usage. This dilemma should be handled very carefully. Since evidence has established that fertilizer usage is encouraged by fertilizer subsidy, it is suggested to reconsider the mechanism of fertilizer subsidy instead of removing it.