A multicommodity equilibrium approach to welfare analysis of market interventions in the Costa Rican agricultural sector

Mario Salazar

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The agricultural sector has a significant profound impact on the income distribution as well as on the balance of payment situation of Costa Rica, it is therefore frequently tampered with by the government;Five agricultural commodities are analyzed: corn, rice, sugarcane, coffee, and beef. The first two represent the subsector devoted particularly to the domestic market, and the last three commodities represent the agricultural export subsector. Each of these commodity markets were examined during the period 1960-80 to determine what have been the relevant market policies;By altering the role of price in the marketplace, a policy will have a redistribution effect on the welfare of the different groups involved in market transactions. These welfare effects are the main concern of this study. A multicommodity equilibrium model was developed, where the demand system was obtained under the standard neo-classical assumption of the consumer theory. On the other hand, the system of derived supplies was obtained by maximizing total revenue subject to an implicit multi-product production function, which was assumed to be linear homogeneous;Both systems of equations, demand and supply, were estimated separately where the coefficients were constrained to satisfy the homogeneity and symmetry conditions. By the assumption of market equilibrium, a system of excess supply equations for the five commodities was obtained. For the composite factor market it was assumed as a given the factor supply. Under this framework all prices, including the shadow price of the composite factor, are determined by the model. The stability condition of this type of model was examined, where the Walrasian dynamic condition was taken as an approximation;Significant differences in the welfare measures given by the partial equilibrium approach, which was estimated for comparison purposes, and the results obtained from the multicommodity model were found. Another was that the welfare changes will also depend on the set of policies already in place in the other related markets. This was particularly true for the price support policies. Fewer significant differences were found for the wholesale ceiling price and tax policies. For all the market interventions analyzed the adjustment effects on the government revenues (losses) and on the private groups demonstrated to be quite significant.

Date: 1984-01-01
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