# Measuring welfare effects of importing sugarby changing in domestic sugar been supply: the case of Iran.

IntroductionSugar been as a staple food, similarly to other foods, is a significant driver in the self-sufficiency of Iran's economy. This crop has an important role in food security of the Iranian households' consumer basket in the form of sugar and hard sugar.

The present paper measures the amount of welfare effects result from the importing sugar in Iran during 1971 to 2008. We calculate the welfare effects in terms of consumer and producer surplus. Therefore, in order to measure changes in consumers and producers surplus associated with the shift of supply curve of sugarbeen because of importing sugar, at first it is necessary to define explicit mathematical functions representing supply and demand equations.Welfare effects are sensitive to assumptive change in price of sugarbeen and also supply and demand elasticity. Thus, functional form for supply and demand is very important. To simplifying purposes the considered supply and demand in this paper is linear. The use of linear supply and demand functions makes it easy to calculate the geometric areas of surplus change using simple algebra. With linear supply and demand functions, the elasticity change as quantity changes along the pertaining axis.

In this paper by using time series data during 1971 to 2008, at first supply and demand equations for sugarbeen are specified. Then, their elasticityis calculated. After it, three scenarios are considered in which the impacts of importing sugarwell be declare as increase of price sugarbeen due to shift of sugarbeen supply curve to the left. So in following the importing sugar it is assumed that the price of sugarbeenincreases in the form of three scenarios as increase of price in amount of 2, 5 and 10 percent.Hence, in any considered scenarios, pertaining welfare effects as change in consumers and producers will be computed.

There are not a lot of studies about welfare effects in agricultural scope especially in importing agricultural products. But, however some research have been accomplished. Fuglie (1995) to explain efficiency and welfare effects implicates to improving crop storage technology. He showed that the rate of return to research on potato storage technology and consequently shifting in supply curve was lie between 44 and 74 percent. Alston and et al., [4] studied the effects of technology on social welfare and analyzed their components. Baghestany and Ahmadian [2] by making scenario calculated the effects of technology progressive in producing corn in Iran. They get the findings that the share of producers from changed surplus is more than consumers in the frame of three scenarios. Ahmadian and Hossainipour [2] calculated the welfare effects resulting from improvement in technology related to producing cotton by auto regressive distributed lag (ARDL) in Iran. They showed that the ratio of producer surplus to consumer surplus is about two times.

Considering the importance of economic welfare subjects this research is of value to an understanding of welfare effects result from some shocks or changes such as ones pertaining to imports.

The remainder of the present paper is classified into sections. Section 2 provides theoretical bases. Section 3 contains the econometrical model. In section 4, data sourcesand variables will be introduced. In section 5 specification, estimation and results will be presented. At last; in section 6 the conclusion is outlined the end.

Materials and Methods

It is remembered thataccording to public sector economics theories, consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good and the total amount that actually pay is indicated by the demand curve. This surplus is a proxy for consumer welfare. In contrast, producer surplus as the difference between what producers are willing and able to supply a commodity at the price they actually receive. This surplus is also shows the amount of producers surplus. In general, social surplus as sum of consumers and producers' surplus indicates the social welfare.

So with considering that economic welfare includes the consumers and producers surplus, measurement of these surpluses is the key for entrance to discuss pertaining to welfare affairs. It must be noted that the computation of the economic surplus of changes in technology level due to research benefits as a parallel shift of the supply function is provided by Alston. He considered a linear supply and demand in his analysis about measuring welfare effects. Alston and Wohlgenant showed that the calculation of welfare effects based on linear supply and demand functions and a parallel supply shift cause less than 10 percent deviation from models using supply and demand functions with constant elasticity or any functional form in between. Therefore, they conclude that a model assuming linear functions of supply and demand and a parallel shift of the supply function due to the change in technology provides a good approximation for the computation of total benefits and their distribution among consumers and producers.

Following Alston, in this paper by considering an appropriate figure, the supply function of sugar been before importing sugarcan be denoted by [S.sub.o]. After importing it shifts to [S.sub.1]. Following shift the supply curve upward from [S.sub.0] to [S.sub.1] on the demand line D in any quantity demanded an increase in the price of discussing good, here sugar beenwill be occur.

Now in order to entrance to algebraic modeling consider the case where importing sugar causes reduction in domestic supply of sugar been and soincreases price of sugar been from [P.sub.o] to [P.sub.1] under this conditions we can write following relationship:

Z = [P.sub.1] - [P.sub.0]/[P.sub.0] (1)

K = d - [P.sub.0]/[P.sub.0] (2)

Where, Z is increase in price, relative to its initial amount before the supply shift. K, also, is the vertical shift of the supply line as a proportion of the indicial price. By using the definition of Z and K one can obtain the elasticity of demand and supply by noted [theta] and [??] respectively as follows:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (3)

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (4)

From to relations 1 drought 4 it is clears that Z [theta] = [??] and one can prove the relationship between Z and K as Z = -K[??]/[??] + [theta].

Now using the above relations we can write the following equations considering initial price and quantity of supply and demanded, namely, [P.sub.o] and [Q.sub.o] as following:

[DELTA]CS = [P.sub.o][Q.sub.o]Z (1 - 0.5 Z[theta])

[DELTA]PS = [P.sub.o][Q.sub.O] (K - Z )(1 - 0.5Z[theta])

[DELTA]TS = [P.sub.o][Q.sub.o] (1 - 0.5 Z[theta])

Where [DELTA]CS, [DELTA]PS, [DELTA]TS are the change in consumer, producer and total or society surplus respectively. Therefore, according to the mentioned analytical model, in the present research the change in the total social value due to the change or improvement in machinery technology in wheat cultivation is [DELTA]TS = [DELTA]CS + [DELTA]PS.

As has been mentioned in various studies in modeling the supply and demand functions, the log-log linear model is preferable to the linear model. Therefore, in the present paper the log-log supply and demand functions are specified as follows:

Ln[Q.sup.s.sub.t] = [[alpha].sub.0] + [[alpha].sub.1]Ln[P.sub.t] + [[alpha].sub.2]Ln[A.sub.t] + [u.sub.t]

Ln[Q.sup.d.sub.f] = [[beta].sub.0] + [[beta].sub.1]Ln[P.sub.t] + [[beta].sub.2]Ln[Y.sub.t] + [v.sub.t]

Where, [[alpha].sub.0] and [[beta].sub.0] are intercepts, [[alpha].sub.1], [[alpha].sub.2], [[beta].sub.1] and [[beta].sub.2] is coefficient of the variables in the model that have been introduced in the Table 1. These coefficients are also direct elasticity. And in the end [u.sub.t] and [v.sub.t] are errors terms. It is remember that in a linear demand equation, the coefficients on the independent variables are the impact multipliers. If the equation is linear in log-log functional form, the coefficients are elasticity if the dependent variable is quantity purchased and flexibilities if the dependent variable is price [3]. But in the present paper knowing only the elasticity is enough.

For this study, we used time series data about the model variables which they have been introduced as table 1 and then some issues associated with the data will be explained.

The used data in this paper were obtained from Hard Sugar Industries of Iran in the form of Time series data over the period 1971-2008.

Considering that the data in this paper is annual time-series data, we need to pre-test for stationary and the existence of a cointegration vector before we move on the specification of model. For this, prior to estimation, the integration properties of the data were investigated using Augment Dickey-Fuller (ADF) unit root test. Therefore, the test of no-stationary of the individual time series has been accomplished using the ADF unit root test with the intercept and trend to avoid possible problems caused by heteroskedasticity in the variables. The result of the test indicates that the variables contain unit root but they become integrated and stationary at first level, at a 95 percent significance level and therefore the test reply was satisfactory.To evaluating the system equations of supply and demand it is assumed that this system is simultaneous. Therefore in this study three stages least square (TSLS) is used.

Results:

As mentioned in the previous 2 in modeling the demand function, the log-log linear model is preferable to the linear model. Therefore we have estimated the system equations as log-log linear form and in terms of using IV and Three Stage Least Squares (TSLS) of seemingly unrelated regression (SUR). The IV procedure allows us to overcome endogeneity problems between independent variables. And the SUR method allows for different error variances in each equation and correction of these errors across equations [1].

The findings result from econometric analyses in this study pertaining to supply and demand equations in the frame of equations system is exhibited in table 2 and 3.

The obtained results from estimated regressions for supply and demand curve in table 2 and 3 indicate that all of the estimated coefficients in the consideringsystem are of the expected sign. And also, econometrically, the results are satisfactory.

Considering logarithmic two side equations, the coefficients for Ln P in table 2 and 3 indicate to priceelasticity of demand and supply respectively. Therefore by using the elasticity one can computes Z and K according to equation 3 and 4. Computed amounts for these parameters are tabulated in table 4. Welfare effects result from shift of supply curve to the left exhibit itself as the changes in consumer and producer surplus. Hence we consider three scenariosfor shifting supply curve in the length of vertical axe, namely P.

In scenario 1 it is assumed that domestic supply curve for sugar been due to importing sugar, shifts to the left and the vertical distance between the supply and its transformedis 0.02 of initial price. In this scenario consumer, producer and social surplus are estimated to have decreased to 2 162 796,2 595 356 and 4 758 152dollars respectively. These surpluses for scenario 0.05increase in price of sugarbeen are about 5 387 480, 6 464 976and 11 852 456dollars. These amounts in scenario3, by 0.10increase in price of sugarbeenfor consumer, producer and social surplus are over 10 774 960, 12 851 904 and 23 626 864dollars respectively.

Conclusion:

The aim of this paper was to identify and measure the welfare effects due to increasing price of sugar been in view of shifting sugar been supply to the left because of importing sugar. Therefore, a comparative static welfare model for measurement of changes in surpluses result from importing sugar accomplished. Hence, the conceptual model in this paper indicates that consequences of shifting sugar been supply in the form of welfare losses how distributed among producers and consumers.

Specifically, using the estimated elasticity of supply and demand, that is, 0.20and -0.24 respectively and applying obtained relations in the theoretical bases section, welfare effects were computed. The results show that under three different scenarios in relation to shift of the supply curve, in the form of increase in the price of sugar been in amount of 0.02, 0.05 and 0.10, total surplus will be changed in amount of 4 758 152, 11 852 456and23 626 864 dollars, respectively.

At last, one of the findings in this study is that the analytical model in it may be applied to various types of shifting in demand and supply functions in order to computing welfare effects due to occurring on or more of the demand or supply shifter.

References

[1.] Greene, William H. 2000, Econometric Analysis, fourth Edition, Prentice Hall.

[2.] Ahmadian, M., Hossinipur, M, 2008, Welfare Effects Evaluation Due to Technology Growth in Producing Cotton in Iran, Agricultural Economics Journal No.4.

[3.] Ferris, N., John, 2005, Agricultural Prices and Commodity Market Analysis, Michigan State University Press.

[4.] Alston, M. Julian, Norton, W. Gorge, Pardy, G. Philip, 1997. Science under Scarcity, Principle and Practice for Agricultural Research Evaluation and Priority Setting.

[5.] Gunawardana, P.J., E.A. Oczkowskik, 1992. Government Policiesand Agricultural Supply Response, Journal of Agricultural Economics, 43: 231-242.

[6.] Lianos, T.P. and G. Rizopoudo, 1989. Estimation of Social Welfare Weights in Agricultural Policy, the Case of Greek Cotton, Journal of Agricultural Economics, 39: 61-68.

[7.] Ahmadian, M., A. Baghestany, 2010. Welfare Effects Evaluation Due to Technology Improvement in Producing Corn in Iran, Agricultural Educations Researches Journal, 1: 31-44.

[8.] Carnoe, Guseppe, 1996. Modeling the U.S. Demand for Imports through Cointegration and Error Correction, Journal of Policy Modeling.

[9.] Keith O. Fuglie, 1995. Measuring Welfare benefits from Improvements in Storage Technology With an Application to Tunisian Potatoes, American Journal Agricultural Economics, 77: 162-173.

[10.] Kruger, A.O., M. Schiffk and A. Valdesk, 1992, Agricultural Incentives in Developing Countries: Measuring the Effects of Sectoral and Economy Wide Policies, World Bank Economic Review, pp: 225-272.

(1) Reza Moghaddasi and (2) Khosro Azizi

(1) Professor of Department of Agricultural Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran.

(2) Faculty Member of Economics Department, Firoozkuh Branch, Islamic Azad University, Firoozkuh, Iran.

Corresponding Author

Khosro Azizi, Faculty Member of Economics Department, Firoozkuh Branch, Islamic Azad University, Firoozkuh, Iran.

E-mail: Khosro.azizi@yahoo.com

Table 1: Variable Definitions [Q.sup.s.sub.t] Output of sugarbeen in period t in tones [P.sub.t] Producer price of sugarbeen in period t in dollar [A.sub.t] Area harvested in hectares [Q.sup.d.sub.t] Sugarbeen quantity demanded in period t Table 2: Estimates of the Three Stages Least Squares (TSLS) for Supply Curve Variables and Intercept Coefficient t-ratio Ln[P.sub.t] 0.2 02.54 Ln[A.sub.t] 0.70 7.80 Intercept 6.81 5.71 Total System Balanced Observations = 74 [R.sup.2] = 0.75 Table 3: Estimates of the Three Stages Least Squares(TSLS) for Demand Curve Variables and Intercept Coefficient t-ratio Ln[P.sub.t] -0.24 -2.25 Ln[Y.sub.t] 0.19 2.28 Intercept 13.31 17.50 Total System Balanced Observations = 74 [R.sup.2] = 0.82 Table 4: Welfare Benefit from an increase in Price of Sugarbeen in the Form of Three Scenarios (In Dollars) Scenarios Z K [DELTA]SC [DELTA]PS [DELTA]TS Scenario 1 0.02 0.044 2 162 796 2 595 356 4 758 152 Scenario 2 0.05 0.11 5 387 480 6 464 976 11 852 456 Scenario 3 0.10 0.22 10 774 960 12 851 904 23 626 864

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Title Annotation: | Original Article |
---|---|

Author: | Moghaddasi, Reza; Azizi, Khosro |

Publication: | Advances in Environmental Biology |

Geographic Code: | 7IRAN |

Date: | Aug 1, 2011 |

Words: | 2623 |

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