Farm modeling for policy analysis on the farm and regional level

Abstract

The Atlantic Zone of Costa Rica accounts for nearly half of the total agricultural income in Costa Rica, and therefore is an important region for agricultural policy. Policy analysis can be performed on the regional level, using regional agricultural sector models that maximize regional welfare, as well as on the farm level, where different farm types are characterized by their specific objectives, production possibilities and resource endowments. While the former approach fails to model farm type-specific characteristics, the simple aggregation to the regional level of the representative farm type results ignores the interaction between the farm types that occurs in product and factor markets. The present study presents a regional equilibrium modeling approach that incorporates farm type characteristics as well as the equilibrium equations for product markets. Compared to a simple aggregation of representative partial results with exogenous output prices, the results produced by the regional equilibrium model indicate that the endogenization of product prices leads to lower levels of specialization in agricultural production, as well as lower incomes, profits and labor use. As such, the results obtained in a model with endogenous prices better reflect reality. A number of policy simulations are performed, including a 20% decrease in transaction costs, a 40% tax on biocide prices, and a 20% increase in credit availability. The former as well as the latter lead to increased cash crop production and corresponding increases in agricultural income, while taxing biocides leads to less biocide intensive cropping systems. The effectiveness of policy measures is, however, overestimated when product prices are assumed exogenous, since endogenously determined product prices limit specialization in the most profitable crops or in crops that require relatively low levels of biocides.