IV-B
IV. Analytical extensions and
policy issues
A. Carbon taxes and fiscal interactions : are Pigovian taxes poss ible?
B. Econo my-wide ‘driver s’ of agricultural expan sion and intens ifi cation.
C. Overview: envi ronmental policies in a second-be st world
1
IV-B
Deforestation and soil depletion
• Large economic magnitudes in SE Asia
• Disproportionately large involvement of the
poorest households
• Strong spatial elements: uplands & forests
• Institutional issues
– ‘Open access’ to forests
– Free disposal of soil runoff and other pollutants
• Economy-wide ‘drivers’
– Prices and policies
– Intersectoral and interregional labor markets
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IV-B
Subwatersheds of Upper Manupali River, Bukidnon
Source: Deutsch et al. 2001
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E-coli counts by sub-watershed
Source: Deutsch et al. 2001
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Source: Deutsch et al. 2001
5
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Can local actions and policies
solve watershed problems?
• Local actions -- by households and
governments -- are certainly necessary
• But not sufficient, when institutions and
markets have external drivers
– Land and forest tenure laws may be
weak/unenforced
– Farm prices set in national or global markets
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IV-B
A stylized upland-lowland model
• Lowland economy:
– Manufacturing and ‘lowland food’ production
• Upland economy:
– ‘upland food’ production and non-food crop
– Land produced by forest clearing
• Interregional linkages:
– Labor market
– Food market (food is non-traded)
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IV-B
Forest
& forestry
Upland economy
Land
Labor
Upland food
Food
market
Tree crops
Lowland economy
Land
Labour
market
Capital
Lowland food
Manufacturing
Labor
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• Two regions, upland and lowland, with p rice-taking r evenue-maximi sing
producers.
• In uplands, two goods are produced: food (n) and non-food, or tree crops;
vectors of upland prices and outputs are PU and YU respectiv ely. Defin e p
as relativ e price of food to tree crops in uplands.
• Upland goods produced with VU input s, containing labor (LU) and upland
land (T).
• Land must be cleared for production, using labor according to T = L.
• Upland producer's problem is captured by revenue function:
U
U
U
R(T, LU – T, p) = max
{P

Y
|
V
}.
T ,Y
• 'Default ' assumption upland food is labor-int ensive, or RnL > 0; RnT < 0
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• Lowland region produces food (n) and manufactures (m) in output vector
YL. Price vector PL has elements p and q, where the latter is the price of
manufactures.
• Lowland food is different to that used in upl ands.
• Each lo wland indust ry uses a sector-specifi c factor (irrig ated land and
manufacturing capital), which we summarize as a vector K = (Kn, Km), and
labor.
• Lowland producer's problem
L
L
L
S(K, L – LU, p, q) = max
{P

Y
|
V
}.
Y
10
Consumption. Assumption s:
IV-B
• Utility deriv ed from consumption of goods and from exis tence of forest.
• Forest-clearing decision takes no account of consumer preferences so
quantity of land cleared is exogenous to the consumer.
• Consumer’s problem is to maximi ze utility subject to income and the
quantity of standing forest (utility is assumed separable between these).
• Forest is quantity-rationed to consumer, so we have conditional
expenditure function:
E(P, F, u) = min {PC | u}
where u =utility, F is quantity of forest land, and P and C contain
prices and quantiti es of food, tree crops and the manufactured good.
* T = 1 – F. ET,= virtu al price of land cleared, or –1* margin al amount the
consumer is WTP to preserve standing forest. Therefore, we have ET Š 0.
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Equilibrium
• Assume manufactures (upland non-food, food) to be import-competing
(exportable, non-traded) with price q (1, p). q is exogenous, p endogenous.
Aggregate budget constraint:
E(p, q, T, u) = R(T, LU–T, p) + S(K, L–LU, p, q).
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IV-B
FONC:
Assume that food is not internationally traded, so at optimum:
Rn + Sn = En.
(4.2)
Forest clearing for upland agricultu re, at optimum:
RT  RL = 0.
(4.3)
Note: assumption that forest clearing de cisions do no t cons ider social costs. Hence in
equili brium t here is m ore tree-clearing than is socia lly optim al, which con fers a neg.
externalit y on consu me rs.
Labor mig rates between regions in response to changes in productivity , so::
RL  SL = 0.
(4.4)
• The solution to (4.1)-(4.4) provid es values for endogenous variables T and
LU, p, and u, giv en exog. variables L, K, q.
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IV-B
(a) When food is a traded good and labor is regionally mobile
Eq. (4.2) does not hold. Taking tot al diff of (4.3 ) and (4.4) and solving:
( RnT  RLn )dp


Rvv
(RLT  RLL ) dT  

 u   S dq  ( R  S )dp  S dL  S dK 
(R


R
)
(R

S
)
dL 
 LT
 Lq
Ln
Ln
LL
LK

LL
LL
LL 


 

The determin ant of the coefficient matrix , DL, is positive by the strict
concavity of the revenue function. An in crease in q giv es:
dLU dq  RvvSLq / D L  0
dT dq  (RLT
(4.6a)
dLU 
 RLL )SLq / D    
 0
 dq 
L
(4.6b)
 RLT  RLL 
0

Rvv


where   
High er labor productivity in lowlands causes down-slope migr ation; high er
labor costs and diminish ed upland labor supply both cause the quantity of
upland cleared for agriculture to dimini sh.
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IV-B
Welfare change
Denote the excess demand for manufactures by Zq = Eq(p, q, T, u) – Sq(K,
L–LU, p, q), noting that Zq > 0 for a net import and Zq < 0 for a net export.
Taking an in crease in q we obtain:
Eu
u
T
 ET
  Zq < 0.
q
q
(4.10)
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IV-B
(b) labor is immobi le but food is non-traded
Eq (4.4) does not hold. By total differentiation of (4.1)–(4.3):
 Eu
du   Zq dq  RL dLU  SK dK  SLdL 
0
ET


  
U
Znn
(RnT  RLn )dp  Znq dq  RnLdL  SnK dK  SnLdL 
 Eu

 0
dT  
(
R


R
)
R
0
vv
nT
Ln


  

.
The determin ant of the coefficient matrix , Dp < 0. For an in crease in q:

dT dq  Z

 mZ R
dp dq   Znq  mZq Rvv / D p
nq
q
> 0 if m = 0
(4.13a)
p
< 0 if m = 0


R
/
D

nT
Ln
(4.13b)
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IV-B
Comparative statics 1: tariff reform in manufacturing
Equilibrium:
E(p, q, T, u) = R(T, LU–T, p) + S(K, L–LU, p, q) + tZq,
(4.30)
When food market clears through trade, results are as for terms of trade
shock (4.6).
When labour is immobil e and food market clears through domestic price
adjustment,
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IV-B
When labour is immobil e and food market clears through domestic price
adjustment,


Znq  mtZqq Rvv
dp

dt
Dp, t
> 0 if m = 0
(4.33a)
 RnT  RLn dp 
dT
  


dt
Rvv

 dt 
< 0 if m = 0.
(4.33b)
Overall welfare when the tariff rate is altered depends on int eractions
between the trade policy and the environmental externality . From (4.30),
Eu (1 tcM )
du
dT
dp
.
 ET
 tZ qq  tZnq
dt
dt
dt
or, using (4.33b ) to elimin ate Žp/Žt,

Znq RnT  RLn dT
du
< 0.
Eu (1 tcM )  tZqq  ET  t



dt
R
dt
vv


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IV-B
Concluding remarks
• U-L model combines two ‘small’ models to
obtain richer specification and results
• Predictions of comparative static effects
depend on key parameter values
– Can define different economic ‘types’ based on
alternative parameter sets (see OEE Chapter 3)
• Empirical and micro research should guide
structural and parameter assumptions.
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