2120 final report.pdf - Agra CEAS Consulting

APPENDIX 2: THIRD COUNTRIESA3.3.4.4. Input substitution elasticities (σ)In the model we employ the Allen-Uzawa elasticity of input substitution (Blackorby and Russell,1989) and so estimates are required for all pairs of inputs. Again, there is very little empiricalevidence on the substitutability between various inputs in egg production. A useful source of Allenelasticities of substitution (AES) for European agriculture is Salhofer (2000) where Table 2 reportsAES between various inputs (land, labour, capital and operating inputs) for animal inputs. Thecapital/animal input estimates range from –2.3 to 3 with a mean of 0.1. Alternatively, we can assumezero substitution elasticity which implies a Leontief technology. However, allowing for somesubstitution might and frequently is very important in policy analysis (e.g, Alston and Scobie, 1983).This model follows Zhao et al., (2000a) (page 47) where they employ 0.1 for all industries in theirmodel.A3.3.4.5. Product transformation elasticity (β)Like Zhao et al. (2000a) (p. 48) there are few estimates in empirical literature to guide this choice ofelasticity. A relatively high degree of product transformation has been assumed between caged shelland processed (-2), but a very inelastic (-0.05) product transformation elasticity between all otherpairs of goods.A3.3.4.6. International price transmission elasticitiesThere is no empirical evidence that indicates how changes in world prices are passed onto domesticconsumers. However, theory dictates that this elasticity must be less than one (Bredahl, Meyers andCollins, 1979). Given the focus of this elasticity is to capture changes in import tariffs we assume anelasticity of 0.95 for caged shell and processed and zero for alternative shell eggs because we areassuming zero trade in this good.A3.4. Measuring economic surplusThe main purpose of building and employing the EDM is to examine and estimate changes ineconomic welfare for producers and consumers as a result of policy shocks. Like previous studiesemploying EDMs we accept the propositions of Willig (1976) in that changes in economic surplus aremeasured off Marshallian demand and supply curves. Furthermore, as only relatively small shifts indemand or supply curves are examined it is the trapezoid area of welfare change that is measuredand as such the errors from using changes in surplus to approximate changes in Hicksian welfare arerelatively small.The analysis conducted with the model is to make a change in one or more of the exogenousparameters. Importantly, the measures of surplus change take account of situations when there aremore than two sources of general equilibrium feedback. In this model the source of equilibriumfeedback occurs in the demand for caged shell, processed and alternative shell eggs demandeddomestically (i.e., there is a price of the substitute good in the demand equation). For all otherdemand and supply stations the measurement of economic surplus is straightforward. For more onthese issues see La France (1991) and Thurman (1991).412