The paper provides an analysis of the implication of dairy policy reform on the agricultural market in the European Union and its individual member states. The paper presents theoretical study of the production control program as well as model based quantitative simulation of the effects of the milk quota abolition. The results obtained indicate that expansion/elimination of milk quotas leads to the changes of market conditions which affect of the farmer’s decisions and regional distribution of production in the EU. The outcome of the milk production after quota elimination would lead to more market based as far as market prices, cost of production and milk yields are concerned. According to simulation’s results the EU milk production would be increased by 4,8% causing decrease of farm milk prices by around 7% as a result of milk quota abolition. Such small changes lead to conclusion that external factors concerning world situation are more important for the future EU milk market development than changes in the milk quota system. Simulated changes of milk production among the member states of EU as a result of dairy reform are diverse. In the most of countries increase of the production is projected, only in a few of them – decrease. The highest percentage increase of the production is expected in Ireland (30%), the highest however quantitative growth is estimated for France and Germany. The empirical analysis confirms a hypothesis derived from the theoretical study. The milk quota abolition has income as well as welfare effects. According to the CAPRI model simulations, overall loss of the agricultural incomes due to milk quota abolition are projected to be around 2.0%, for dairy farmers – 5,8% among them. The main beneficiaries of the reform are consumers. They would benefit from declining prices of dairy products. The welfare based analysis in general gives a small gains to the EU-27 while in the same time – losses for new member states.