Specification and Estimation of Regular Inverse Demand Systems: A Distance Function Approach

To allow realistic policy simulations in a changing environment, inverse demand systems must remain regular over substantial variations in quantities. The distance function is a convenient vehicle for generating such systems. While its use directly yields Hicksian inverse demand functions, those functions will not usually have an explicit representation in terms of the observable variables. However, this problem need not hinder estimation and can be solved by using a numerical inversion estimation approach. This article develops the formal theory for using distance functions in this context and demonstrates the operational feasibility of the method.     

Functional Land Management for managing soil functions: A case-study of the trade-off between primary productivity and carbon storage in response to the intervention of drainage systems in Ireland

Globally, there is growing demand for increased agricultural outputs. At the same time, the agricultural industry is expected to meet increasingly stringent environmental targets. Thus, there is an urgent pressure on the soil resource to deliver multiple functions simultaneously. The Functional Land Management framework (Schulte et al., 2014) is a conceptual tool designed to support policy making to manage soil functions to meet these multiple demands. This paper provides a first example of a practical application of the Functional Land Management concept relevant to policy stakeholders. In this study we examine the trade-offs, between the soil functions ‘primary productivity’ and ‘carbon cycling and storage’, in response to the intervention of land drainage systems applied to ‘imperfectly’ and ‘poorly’ draining managed grasslands in Ireland. These trade-offs are explored as a function of the nominal price of ‘Certified Emission Reductions’ or ‘carbon credits’. Also, these trade-offs are characterised spatially using ArcGIS to account for spatial variability in the supply of soil functions.To manage soil functions, it is essential to understand how individual soil functions are prioritised by those that are responsible for the supply of soil functions – generally farmers and foresters, and those who frame demand for soil functions – policy makers. Here, in relation to these two soil functions, a gap exists in relation to this prioritisation between these two stakeholder groups. Currently, the prioritisation and incentivisation of these competing soil functions is primarily a function of CO₂ price. At current CO₂ prices, the agronomic benefits outweigh the monetised environmental costs. The value of CO₂ loss would only exceed productivity gains at either higher CO₂ prices or at a reduced discount period rate. Finally, this study shows large geographic variation in the environmental cost: agronomic benefit ratio. Therein, the Functional Land Management framework can support the development of policies that are more tailored to contrasting biophysical environments and are therefore more effective than ‘blanket approaches’ allowing more specific and effective prioritisation of contrasting soil functions.     

The Use of Conditional Cost Functions to Generate Estimable Mixed Demand Systems

Mixed demand systems have been virtually ignored in empirical work solely because derivation of these systems requires closed forms for both direct and indirect utility functions. This article proposes the alternative of using a conditional cost function to generate empirical mixed demand models. This approach allows the estimation of mixed demand systems, which are explicit in an unobservable variable (utility), but may lack a closed form representation in terms of observable variables such as prices, quantities and expenditure. Results indicate that this approach is operationally feasible, which opens up a wider range of mixed demand specifications in static analyses.     

Wholesale Demand for Fish in Greece

Inverse demand systems explain price variations as functions of quantity variations. This article presents a dynamic inverse almost ideal demand system (AIDS) model based on recent developments on cointegration techniques and error correction model. The case of fish landed at Greek seaports appears to suit this model well. The results indicate that the underlying distance function is homothetic whereas the own-quantity flexibilities suggest that the responses of price to own-quantity changes are inelastic. Finally, the results of cross-quantity uncompensated flexibilities suggest that the substitution possibilities among fish grades are rather limited. The Allais interaction intensities verified the substitutability among fish grades as well.     

Deriving a Flexible Mixed Demand System: The Normalized Quadratic Model

This article deals with the specification of a locally flexible and theory-consistent system of mixed demand functions, a framework that allows for a rich set of possibilities about what is assumed as exogenous in a demand model. A coherent mixed demand system is derived by using the restricted expenditure function typically studied in the related area of rationed demands. The method is implemented by a new normalized quadratic (NQ) parameterization of the restricted expenditure function. The resulting NQ mixed demand system is illustrated with an application to a nine-good model of the Italian demand for vegetables.     

Land use optimization in watershed scale

Managing a watershed for satisfying the inhabitant's demand is a difficult task if one has to maintain a reasonable balance between usually conflicting environmental flows and demands. The solution to these complex issues requires the use of mathematical techniques to take into account conflicting objectives. Many optimization models exist for general management systems but there is a knowledge gap in linking practical problems with the optimum use of all land resources under conflicting demands in a watershed. In the present study, an optimization problem has been formulated for the Brimvand watershed, Iran, comprising ca. 9572 ha to find out the most suitable land allocation to different land uses, viz. orchard, irrigated farming, dry farming and rangeland targeting soil erosion minimization and benefit maximization.     

Characteristics and hedonic pricing of differentiated beef demands

We estimate a CBS system model of U.S. derived demand for meat. We use this model (1) to examine relationships between three quality categories of beef and three other meats and (2) to simulate how taste shifts have affected demands for meats over time. We extend previous studies by disaggregating wholesale beef production into three quality categories: (1) USDA Choice grade or higher, (2) USDA Select or lower, and (3) cow and bull beef. Innovative features of our empirical model include a breakout of ‘table cuts’ into Choice and Select and the use of a hedonic characterization of the two breakouts to value “Choice‐ness” and “beef‐ness.” Our model demonstrates important shifts in separate demands for Choice and Select beef. We show that, separately, the demand for Choice‐grade beef declined in the 1980s and 1990s and the demand for Select beef increased, a departure from the relatively stable demand characterizations of more aggregated measures of combined Choice and Select beef.     

Payoffs from research and development along the Australian food value chain: a general equilibrium analysis

The payoffs and distribution of payoffs from research and development (R&D) along the food value chain depend on many interacting economic factors. To quantify these, we have developed a general equilibrium model of the Australian economy with detailed farming, processing and marketing information. We use the model to assess potential payoffs and distributions from various R&D scenarios that lead to demand expansion and productivity improvement. We find that productivity improvement caused by R&D is unambiguously beneficial to the whole economy while the benefits of export or domestic market demand expansion mainly accrue to the primary producers and processing industry, when the economy is at full employment. Also, productivity improvement from R&D on‐farm may benefit processors while improvements postfarm may benefit farmers.     

Urban population looking for rural landscapes: Different appreciation patterns identified in Southern Europe

In the context of the peripheral European rural landscapes, the role of the urban population, generally referred to as the ‘outsiders’, has shown to be influential in the dynamics of rural space. This influence occurs namely through the demand for non-productive functions leading to the emergence of new modes of occupancy. In addition, the emerging policy framework concerning policies and planning in rural landscapes call for an improved understanding of the diversified social demands for these landscapes. We argue that a more profound knowledge on the urban demand for rural landscape is needed to better integrate the urban interests into rural policy and planning. The present paper aims to gain greater insight on this demand by identifying landscape preferences of urban users, framed by the multifunctional transition theory, and using a photo-based survey with contrasting land covers derived from CORINE Land Cover classes. Furthermore, the use of land cover classes as the main landscape component, and thereby relating preferences to specific land covers, offers a sound basis for a territorial approach, able to integrate landscape into rural policy and land use planning practice. A case-study in Southern Portugal was developed at the regional scale and results showed different appreciation patterns for rural landscapes varying from humanised and more naturalised landscapes according to the different functions sought by urban users. Another prominent result is that urban demand for rural landscapes, even if driven by consumption, is strongly influenced by both protection and production values. A deeper knowledge on the interests of urban population can be a step forward for rural communities, land managers, and sectoral policy decision-makers to better define investment strategies in rural-urban partnerships facing the growing urban demand over rural space.     

The Potential for Nitrogen Abatement Trading in Agriculture: A Hypothetical Market Experiment

The effectiveness of nitrogen abatement trading as a policy measure relies on both heterogeneity in costs and environmental effectiveness across landscapes. Cost‐efficient implementation may therefore critically depend on spatial distributions of farm and farmer characteristics in water catchments. We use a spatially specific hypothetical market experiment to analyse the likelihood of farmers’ enrolment into nitrogen abatement trading contracts, and derive demand and supply functions for farmers’ nitrogen abatement. We find that farm characteristics influence both the decision whether to supply or purchase nitrogen abatement, as well as the amounts being traded. The derived demand and supply functions for farmers’ N abatement, using hypothetical market experiment data, can be used to reveal the variability in costs of abatement within a market. This provides valuable information to test potential trading schemes ex ante, to evaluate potential economic gains from policy implementation.     

Measuring Market Power for Food Retail Activities: French Evidence

In this paper we develop and estimate an empirical model of pricing behaviour for food retail firms in both a quantity‐setting oligopoly engaged in the joint production of demand‐related final goods and a quantity‐setting oligopsony for supply‐unrelated wholesale goods. The procedure consists of estimating an inverse demand system for the final goods, single supply functions for the wholesale goods and the retail industry first‐order profit‐maximisation conditions, from which an estimate of the degree of imperfect competition and of oligopoly‐oligopsony power for the different commodities can be retrieved. The model is applied to the French food retail industry and three commodities are distinguished: dairy products, meat products and other food products. We strongly reject the hypothesis that French food retail firms behave competitively, and more than 20 and 17 per cent of the wholesale‐to‐retail price margins for dairy products and meat products, respectively, can be attributed to oligopoly‐oligopsony distortions.     

An application of optimal control theory to agricultural policy analysis

Since the early 1970s there has been interest in the application of optimal control theory to the management of economic systems. Specifically, optimal control theory prescribes policy strategies which optimise a quantifiable policy preference function subject to market equilibrium conditions. Problems of this kind have been identified among agricultural markets and this paper aims to illustrate the application of optimal control theory to the British potato market. The paper takes evidence from policy makers to derive target values for the producer price, imports, and the changes in the quota area from year to year. The constraints on optimisation are specified in terms of a partial equilibrium econometric model which specifies, demand, supply and trade relationships. The policy preference function is specified as a quadratic and a ‘revealed preference approach’ is employed to estimate the parameters which penalise market equilibria which over or under-shoot policy targets. The resulting optimal control problem is minimised by a dynamic programming routine. The results suggest that policy makers may benefit from taking dynamic effects directly into account when formulating policy strategies.     

Scale Effects and Mark-ups in the US Food and Fibre Industries: Capital Investment and Import Penetration Impacts

Capital investment patterns and import penetration are often alleged to influence firms' costs and prices, and thus economic performance. We examine the impacts of these factors on measures of scale economies, input demand/composition, and market power in the US food and fibre industries. Flexible variable cost functions incorporating quasi-fixity of three categories of private (internal) capital and two external technological and trade (import) factors represent the cost structures of the two industries. Pricing equations, based on inverse demand functions including import prices, represent output decisions. Cost and demand elasticities constructed from this model indicate reduced manufacturing costs from technical and trade, scale and capital effects. This increased cost efficiency arises largely from materials savings in the textiles industry and reduced labour use in the food industry. Mark-up behaviour is exhibited for most of the sample period in the textiles industry, and neither industry appears heavily affected by import prices.     

Forms of Scale Curves and Differential Inverse Demand Systems

This article provides a new interpretation of the scale effects in differential inverse demand systems. A scale curve is defined as a curve that shows how the expenditure share of a good or service changes as the consumption level changes. It is shown that Brown, Lee, and Seale's synthetic model has the same scale effects as do the Box–Cox scale curves. In this light, their model is not a mere composite but a model in its own right. An empirical illustration given for Japanese fresh food demand suggests that the underlying scale curves differ from both linear and loglinear forms.     

THE DEMAND FOR INPUTS AND THE AGGREGATE SUPPLY FUNCTION FOR AGRICULTURE*

This paper presents a theoretical derivation of aggregate supply elasticities from the relevant input demand elasticities. By way of illustration, an estimate of the aggregate supply elasticity with respect to product price for United Kingdom agriculture is calculated. In addition, the paper investigates the supply function that is implied by input demand functions which contain a geometrically declining lag distribution. The paper concludes by suggesting that the indirect estimation of aggregate supply elasticities may well be preferable to direct estimation of the elasticities.     

Productivity,credit, risk,and the demand for weather index insurance in smallholder agriculture in Ethiopia

The article explores the relationship between fertilizer use and the demand for weather index insurance (WII) among smallholder farmers in Ethiopia. We examine whether fertilizer use is profitable under current smallholder production conditions, whether risk‐related factors affect fertilizer use, and we estimate the returns to inputs in the agricultural production function in the absence of insurance. We then study how these primitives of agricultural production functions relate to insurance demand. The study compares a survey‐based estimate of willingness to pay with actual uptake for the weather insurance, finding the stated and actual demand to be almost completely uncorrelated. While those with high marginal returns to inputs say they would purchase insurance, only those with low marginal returns actually do, consistent with the stated purpose of the product as input insurance. Insurance demand proves to be highly responsive to the existence and amount of randomly allocated insurance vouchers.     

Measuring Individual Preferences for Rural Multifunctionality: The Importance of Demographic and Residential Heterogeneity

We propose an approach to conceptualise ‘rural multifunctionality’ and further investigate peoples’ preferences for it. We use an opinion survey concerning individual preferences for several functions that rural spaces should provide. We use the analytical hierarchy process approach to assess the relative importance of each function. The results show how the social weightings of these functions are balanced, confirming that society demands truly multifunctional rural territories. Nonetheless, differences are found in individual preferences. We explore the demographic and socioeconomic determinants of these individual preferences, paying particular attention to the importance of heterogeneity using seemingly unrelated regressions. In short, results from this research could be employed as a useful informative element for the future development of public policies related to rural spaces.     

PRODUCTION TECHNOLOGY AND INPUT ALLOCATIONS IN SRI LANKAN MULTICROP FARMING

A primal production analysis is conducted of 182 farm households producing multiple outputs in the Sri Lankan dry zone. The approach involves systems estimation of the production functions with first-order equations for variable inputs and permits recovery of the production technology for each crop. Land and family labour are regarded as constraining inputs. Shadow prices are computed for the constraining inputs and yield important implications for increasing household profits. Evidence of global homotheticity in a subset of three inputs is found for three of the crops. Weak separability is rejected in all tested subsets except for fertiliser and chemicals used in the production of vegetables. Input demand elasticities are computed for allocations satisfying necessary and sufficient conditions for profit maximisation. Highly elastic conditional input demands and output supplies are implied.     

The Law of Demand versus Diminishing Marginal Utility

Diminishing marginal utility (DMU) is neither necessary nor sufficient for downward-sloping demand. Yet, upper-division undergraduate and beginning graduate students often presume otherwise. This paper provides two simple counter-examples that can be used to help students understand that the Law of Demand does not depend on DMU. The examples are accompanied with the geometry and basic mathematics of the utility functions and the implied ordinary/Marshallian demands.     

An inverse demand analysis with introduction of quality effects: an application to Spanish consumption of fruit and vegetables

This article analyzes consumer preference for fruit and vegetables when, by using time series with socioeconomic characteristics of households, there can be seemingly unobserved quality effects, which are increased by aggregation. The changes in Spanish demand for fresh and processed fruit and vegetables over the period 1987–2000 are discussed. Following previous tests and analyses, quantities are taken as predetermined and prices as matching the offer conditions. Thus, quality effects (based on the nutritional and/or health value of the product) are estimated from the error terms associated with the functions of the unit values. Quality variables are introduced as taste shifters in the inverse demand system (Laitinen–Theil model). The results show the positive effects of quality differences on the normalized price for the group of products through own‐quality flexibilities, and the negative effects between fresh and processed products through cross‐quality flexibilities.