The economic implication of rising transport cost for a small open economy: a case study of Hawaii’s vegetable sector

Abstract

In this paper, we modified the two-region trade model developed by Dunn et al. (Agribusiness 3(4):393–402, 1987) for a small, open economy by incorporating the effect of transport cost on production cost. We then used the model to investigate the welfare impacts of rising transport cost in terms of consumer and producer surpluses, using the vegetable sector in Hawaii as a case study. We showed that the two key parameters affecting the adjustments in Hawaii’s vegetable sector in response to the change of transport cost and the subsequent welfare impact are the transport cost content of the imported product and the local farm share of retail price. Using the import statistics of 10 major vegetable crops in 2006–2007, we found that every 1% increase in transport cost is expected to enhance the self-sufficiency of Hawaii’s vegetable sector by approximately 0.5%, but at a cost of $0.27 million surplus loss.