Spatial equilibrium modeling for evaluating inter-regional trade flows, land use and agricultural policy

Abstract

This chapter presents a Spatial Equilibrium Model (SEM) for analyzing the spatial patterns of agricultural supply, demand, trade and pricing in Costa Rica. The behavioral relations of producers and consumers are modeled, while simultaneously taking transaction costs and government policies into account. The SEM maps 17 major agricultural commodities across six planning regions and the rest-of-the-world, considered as a seventh region. The model is validated with 1995 data, and its results are used to assess spatial patterns of land use, trade flows and social welfare. The model’s simulations show the potential effects of trade liberalization, changes in transport costs, technological progress in agriculture, and economic growth. Trade liberalization leads to increased welfare, mainly due to a rise in the consumer surplus resulting from lower import prices. Reductions in transport costs also have a positive welfare effect, as a result of increased domestic trade, more specialized regional production, and a growth in exports. Technological progress in agricultural production lowers unit production costs, and mainly favors production of export products, whose relative competitiveness is enhanced. Finally, economic growth increases domestic demand, leading to increased imports, fewer exports and a slightly enlarged domestic production. The study shows that on the basis of reliable data and sound econometric analysis, an agricultural sector model can be developed that both policy makers and research institutions could use to evaluate the effectiveness of alternative agricultural policy measures.