Demand Analysis
5. Policy Experiments
Conduct the following experiments:
Experiment 1. Eliminate the food subsidy on soft wheat, which currently absorbs 54% of the food subsidy budget. What are the effects on real income, calorie intake, and the government’s subsidy budget? Paste your results in the “Record of Results” area of the spreadsheet, keeping track of the exogenous price changes that you have made (in this case dp/p = 0.50 for soft wheat).
Experiment 2. Eliminate the subsidy on edible oils instead of that on soft wheat. How do the implications differ from the impact of eliminating the food subsidy on soft wheat and why?
Experiment 3. While eliminating the food subsidy on edible oils, introduce a subsidy to barley which is much cheaper nutritionally. By how much would you have to lower the price of barley in order to keep constant the nutritional status of the rural poor? (Proceed to change
the price of barley until the calorie impact is zero.) Does it create significant savings for government?
Experiment 4. Now eliminate the food subsidy on soft wheat instead of that on edible oils, and protect the nutritional status of the poor by subsidizing barley. By how much do you now need to lower the price of barley? Which of these alternative subsidy schemes would you recommend to the Moroccan government?
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LES elasticities AIDS elasticities Commodity group Expenditure Own–price Expenditure Own–price
Food 0.43 –0.21 0.35 –0.51
Alcohol plus tobacco 0.22 –0.08 0.22 –0.25
Clothing 0.58 –0.24 0.92 –0.38
Housing 1.57 –0.57 0.28 –0.39
Utilities 1.17 –0.38 0.64 –0.67
Transportation 1.09 –0.38 0.47 –0.47
Medical care 1.99 –0.61 0.79 –0.70 Durable goods 1.39 –0.52 3.93 –0.04 Other nondurable goods 1.39 –0.45 1.46 –1.21 Other services 0.96 –0.36 0.83 –0.28
Other miscellaneous goods 0.64 –0.22 0.42 0.03 Source: Blanciforti, Green, and King, 1986.
Product Country Period Own-price Income or expenditure
Cross-price R2
Food Chile 1964 –0.45* 0.45* — —
Greece 1958-65 –0.49* 0.67* — 0.99
Peru 1950-58 –1.01* 0.99* — 0.99
South Korea 1955-68 –0.47 0.72a — 0.99 Philippines 1953-65 –0.35 0.52a — 0.99
Taiwan 1955-68 –0.41 0.57a — 0.99
Thailand 1960-69 –0.68 0.84a — 0.98
Foodgrains Bangladesh 1963-79 –0.17* 0.30* — —
India 1951-66 –0.34* 0.49* — —
Jamaica 1959-68 –0.47 0.58a — 0.93
Total cereals India 1951-68 –0.50* 0.79 — 0.57
Ghana 1953-70 –2.32 0.71 –2.22 (yams) — Rice India 1951-68 –0.75* 0.94* — 0.57 Ghana 1953-70 –1.25* 0.71* –0.58 (cereal) — Wheat India 1951-68 –0.22 1.06 — 0.87 West Pakistan 1963-64 –0.10 0.21a — — Argentina 1963 –0.03 0.16 0.60 (rice) — Cassava Ghana 1953-70 –0.64 0.82 0.85* (rice) — Potatoes Argentina 1963 –0.13* 0.04 — — Pulses West Pakistan 1963-64 –0.05 to –0.08 0.16a — — Edible oils West Pakistan 1963-64 –0.05 to –0.8 0.5a — — Milk West Pakistan 1963-64 –0.29 to –0.38 1.02a — —
Argentina 1963 –0.29 0.17* — —
Source: Scandizzo and Bruce, 1980.
aReported without the statistical information.
*Significant at 10% level.
Commodity
Share of total budget (percent)
Elasticity of quality with respect to total
expenditure
Elasticity of quantity with respect to total
expenditure
Elasticity of quantity with respect to price
Rice 24.5 0.03 0.49 –0.42
Wheat 0.5 0.10 1.57 –0.69
Maize 5.8 –0.00 0.09 –0.82
Cassava 1.3 0.02 0.14 –0.33
Roots 0.6 0.17 0.71 –0.95
Vegetables 5.6 –0.04 0.67 –1.11
Legumes 3.7 0.04 0.85 –0.95
Fruit 1.9 0.07 1.39 –0.95
Meat 2.1 0.09 2.30 –1.09
Fresh fish 2.9 0.22 1.08 –0.76
Dried fish 2.8 0.06 0.57 –0.24
Source: Deaton, 1989.
Deficient stratum Nondeficient stratum Food for which
supply has increased
Direct effect
Indirect effect
Net effect % reduction in deficiency
Direct effect
Indirect effect
Net effect
Beef 14.6 –6.5 8.1 3.4 23.7 1.0 24.6
Milk 6.2 –3.0 3.1 1.3 10.1 0.4 10.5
Rice 36.1 6.9 43.0 18.2 31.8 –1.0 30.8 Maize 38.2 0.1 38.3 16.2 22.2 –2.2 20.0
Beans 7.8 0.3 8.1 3.4 5.3 0.0 5.3
Peas 0.2 –0.7 –0.4 –0.2 0.6 0.2 0.8
Potatoes 10.9 4.2 15.1 6.4 6.4 –2.6 3.8 Cassava 17.3 5.8 23.1 9.8 10.1 –11.2 –1.1 Vegetables 2.6 –1.6 1.0 0.4 2.4 0.3 2.6 Source: Pinstrup-Andersen, de Londoño, and Hoover, 1976.
1 23 4 56 7 8 9 10 11 12 13 14 15 16 17 1819 20 21 22 23 24 25 26 27 28 29 30 3132 33 34 35 36 37 38 39 40 41 42 43 4445 4647 48 49 50 5152 53 54 55 56 57 58 59 60 6162
Table 2E.1. Food subsidies in Morocco
Soft Hard Total
wheat wheat Barley Edible oils Sugar Other food Nonfoodsexpenditure Household expenditures (1984 dirhams)
Income deciles
1 poorest 230 68 95 135 162 662 1105 2456 2 232 145 203 290 319 1711 1703 4603 3 163 203 285 447 447 2521 2190 6256 4 203 203 355 507 507 3293 2728 7795 5 243 304 426 669 608 3831 3274 9355 6 210 420 490 700 700 4482 4113 11115 7 249 499 499 748 665 5653 5095 13409 8 399 698 598 897 797 6579 6373 16342 9 362 966 604 1087 966 8090 8744 20818 10 richest 754 1885 754 1319 1319 12817 20419 39267 Logarithm of expenditures
Income deciles 1 poorest 2 3 4 5 6 7 8 9 10 richest Budget shares (w)
Income deciles 1 poorest 2 3 4 5 6 7 8 9 10 richest
Estimated elasticities for rural decile 1
Income elasticities (e) Weighted sum
w decile 1 Estimated e Calibrated e decile 1 Price elasticities (E) Flexibility of mone -4
Soft wheat 0.00 0.00
Hard wheat 0.00 0.00
Barley 0.00 0.00
Edible oils 0.00 0.00
Sugar 0.00 0.00
Other foods 0.00 0.00 0.00 0.00 0.00 0.00 Nonfoods 0.00 0.00 0.00 0.00 0.00 0.00
63 64 65 66 67 68 69
Table 2E.2. Food subsidies in Morocco: Policy analysis
Decrease the food subsidies budget while protecting nutritional status of the poor (poorest decile rura Soft Hard
wheat wheat Barley Edible oils Sugar Other food Nonfoods Total Initial structure of consump
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113
tion and subsidies Budget shares (w)
Calorie shares (c) 0.27 0.09 0.31 0.14 0.12 0.07 0.00 1.00 Subsidy shares (b) 0.54 0.00 0.00 0.32 0.10 0.04 0.00 1.00 c/w
Income elasticities (e)
Subsidies budget (B 115 68 212
Calibrated price elasticities
Soft wheat -0.75 0.09 0.17 -0.02 0.02 0.03 0.01 Hard wheat 0.23 -0.35 0.06 0.24 -0.48 -0.42 -0.57 Barley 0.38 0.06 -0.36 -0.05 0.08 -0.38 -0.50 Edible oils -0.07 0.13 -0.04 -0.61 0.18 -0.18 -0.28 Sugar 0.00 -0.19 0.05 0.16 -0.55 -0.07 -0.15 Other foods -0.05 -0.04 -0.07 -0.05 -0.04 -0.48 -0.38 Nonfoods -0.06 -0.03 -0.06 -0.05 -0.05 -0.23 -0.64 Worksheet for policy experiment
Policy instruments
dp/p exogenous 0.50 0.00 0.00 0.00 0.00 0.00 0.00 Endogenous changes
dq/q ds/s dS/S
Results of policy experiment: Indicators of real income, calorie, and budget cost 100*dy/y y is the real income of rural decile 1 100*dqc/qc qc is the calorie intake of rural decile 1
100*dB/B B is the government budget on food subsidies to rural decile 1 Record of results: Alternative subsidy schemes
Experiments 1 2 3 4
Exogenous price changes dp/p wheat 0.50 dp/p barley
dp/p oils
Endogenous policy criteria 100*dy/y -4.68 100*dqc/qc -3.91 100*dB/B -55.17
! = " 1
! = 0
! = " 1
Linear Engel curves
Double logarithmic Engel curves q
Inferior goods
y
! # " $ (a > 0, b < 0)
-a/b a
a/2
-a/3b
Semilogarithmic Engel curves q
y q
y luxury
b > 1 Normal goods
necessity b < 1
everywhere
! = b
(b > 0)
Normal goods q
y luxury
q < b
necessity q > b
! = 1
! # 0
e"a/b e(b"a)/b
b
(b > 0)
q
y
! # 0
! # " $ Inferior goods
(b < 0)
– b
e"(a+b) /b e"a/b
q
y luxury
a < 0 Normal goods
necessity a > 0
! = 0
! # 1
! # 1
! # $ (b > 0)
Inferior goods (b < 0)
everywhere
! = b
everywhere
! = b