Welfare analysis in a two-stage inverse demand model: an application to harvest changes in the Chesapeake Bay

Abstract

Like many agricultural commodities, fish and shellfish are highly perishable and producers cannot easily adjust supply in the short run to respond to changes in demand. In these cases, it is more appropriate to conduct welfare analysis using inverse demand models that take quantities as given and allow prices to adjust to clear the market. One challenge faced by economists conducting demand analysis is how to limit the number of commodities in the analysis while accounting for the relevant substitutability and complementarity among goods. A common approach in direct demand modeling is to assume weak separability of the utility function and apply a multi-stage budgeting approach. This approach has not, however, been applied to an inverse demand system or the associated welfare analysis. This paper develops a two-stage inverse demand model and derives the total quantity flexibilities which describe how market clearing prices respond to supply changes in other commodity groups. The model provides the means to estimate consumer welfare impacts of an increase in finfish and shellfish harvest from the Chesapeake Bay while recognizing that harvests from other regions are potential substitutes. Comparing the two-stage results with single-stage analysis of the same data shows that ignoring differentiation of harvests from different regions, or the availability of substitutes not affected by a supply shock, can bias welfare estimates.

Estimating the Economic Impacts of Climate Change on 16 Major Us Fisheries

“…To estimate the consumer welfare impacts of projected changes in commercial landings, we employ a two-stage inverse demand model, building on the work previously conducted by Moore and Griffiths (2018) . This approach captures interactions between the demands for different species, recognizing consumers’ ability to adapt to changes in market conditions and optimize their utility by reallocating their expenditures.…”

“… Moore and Griffiths (2018) demonstrate how to estimate price changes and consumer welfare impacts in a multi-stage inverse demand system; we apply their approach to our projected changes in harvest. In a two-stage model, prices are determined by the consumers first allocating expenditures to fishery groups based on the aggregated supply in each, then among the individual species modeled in the second stage.…”

“…We estimate the consumer welfare impacts using a distance function approach ( Moore and Griffiths, 2018 ; Kim1997 , see Appendix for derivation). The distance function is dual to the expenditure function and measures how the consumption bundle must be scaled to reach a reference level of utility.…”

How trade affects the US produce industry: the case of fresh tomatoes

“…Traditional demand system models assume prices are predetermined at the market level, which is unrealistic for perishable goods (Asci et al, 2016;Suh et al, 2017). This study uses the Generalized Inverse Demand System (GIDS) which properly addresses the issue (Brown et al, 1995;Eales and Unnevehr, 1988;Li et al, 2019;Moore and Griffiths, 2018;Wong and Park, 2018). Following Holt and Goodwin (1997), quantities of tomatoes are assumed fixed in the short run because the perishable nature of tomatoes requires products to be cleared in market within a short timeframe, and the relatively long production cycle makes adjustment within season infeasible.…”

Developing a Community of Practice for Applied Uses of Future PACE Data to Address Marine Food Security Challenges

“…Benefit assessments are complicated by environmental, regulatory, and business factors, such as new firms entering a commercial fishery once water quality improves and stocks grow. An estimate of the benefit of improved water quality in the Chesapeake Bay to striped bass sport fishing alone was valued at $15M in 1996 dollars (Morgan and Owens, 2001;Moore and Griffiths, 2017). Efforts to specifically address the benefit of incorporating Earth observations into decisions is currently being undertaken by the NASA-funded Consortium for the Valuation of Applications Benefits Linked with Earth Science (VALUABLES).…”