2120 final report.pdf - Agra CEAS Consulting

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THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENSThe EDM approach is not uncommon in economics as it simply involves comparative statics. Astructural model is built that describes the industry and/or markets of interest. This structural modelis then combined with various types of data (i.e. elasticities, shift parameters, share parameters) todescribe the initial equilibrium prevailing. Then, for example, a policy shock or change to some otherexogenous variable is allowed. The type of shocks that can be accommodated by a model willdepend on its structure and clearly the structural model is designed with the type of policy shock ofinterest in mind.There are several reasons for using an EDM to undertake the modelling of the EU egg sector.First, as Piggott (1992) argues, the main strength of EDMs is: that it allows qualitative assessmentsto be made of the impacts on endogenous variables of infinitely small changes in exogenousvariables.’ (p.133).This means that it is relatively simple to undertake ’what if’ analysis and to examine various scenariosof interest to the industry.Second, EDMs are also very useful at yielding estimates of policy change when either limited timeor resources are available to conduct econometric modelling. Without a huge data collectioneffort it is unlikely that an econometric model can be developed to capture the necessarycomplexities of industry structure. The data requirements of an EDM are minimal and much ofthe data can be obtained from secondary data sources and existing research.Third, an important aspect of EDMs is that they require the use of elasticities and in many casesthese elasticities can be obtained from the literature. However, it is also not uncommon forelasticities not to exist for certain parameters of a model and in cases such as this eithereconomic theory or qualitative information is required. As with all models it is important tovalidate the reliability of results obtained and in the case of EDMs it is common practice toundertake extensive sensitivity analysis using Monte Carlo methods.Fourth, Zhao, et al., (2003) argue that an EDM is an appropriate approach to take in specificmodelling situations. When a researcher is concerned with analysing disaggregated industrysectors and there is limited data, an EDM is well suited. An alternative approach, and one thathas already been used to examine the egg industry, is computable general equilibrium (CGE)modelling (van Horne and Bondt, 2002). However, when an industry is small relative to the restof the economy, such as the egg industry, and the commodities in question have few closesubstitutes in production or consumption, then an EDM is more appropriate. Furthermore,many CGE models are highly aggregated in nature and as such they do not provide the richnessof detail that an EDM can incorporate. This has a detrimental impact on the breadth and depthof industry specific results. This point in neatly borne out by the work of van Horne and Bondt(2002) who previously used the GTAP GCE model to consider the impact of Directive1999/73/EC. The GGTAP database not only aggregates many countries into regions, ignoring the88
THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENSimportance of intra-regional trade, but also it does not model eggs as a separate productionactivity. Instead eggs are subsumed into intensive livestock along with pigs and poultry. Also,eggs are not disaggregated to include shell eggs from alternative production. Therefore for thetype of results and information required it is clear that an EDM is more appropriate and canprovide superior results.7.1.1. EDM Model SpecificationThe simplest way to describe the EDM employed is to consider Figure 7.1 below.InputsFeed, Labourand OtherEggProductionCagedShelldAlternativeTrade with ThirdCountriesProcessedFigure 7.1: Schematic diagram of the EDM modelFigure 7.1 shows that the EDM is comprised of an egg production sector that employs three primaryinputs (feed, labour and ‘other’). The ‘other’ input category captures all activity that has a potentialbearing on cost of production, principally bird depreciation (see Section 2.4) for a full breakdown ofthe cost structure). The eggs that are produced are then separated into three types: caged shell,alternative shell and processed. Finally, trade in both caged shell and processed eggs is included and,depending on individual Member State circumstances will be either a net import or a net exportrequirement.The first step in making the model operational is to characterise the various market relationshipsalgebraically. To conduct policy analysis with the model it is ‘shocked’ or displaced from its initialequilibrium as a result of some exogenous change (e.g., a demand or supply shift). By totallydifferentiating all equations in the model and expressing these in the form of elasticities the modellinearly relates changes in the endogenous variables to changes in exogenous variables.89
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