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DATA CONFESSION in the PORTUGUESE EDM REGION

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  • Leonardo Costa

    ()
    (Faculdade de Economia e Gestão - Universidade Católica Portuguesa - Porto)

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    Abstract

    A dual profit model is used to characterize the Entre Douro e Minho (EDM) region agriculture. The data comes from budgets for twelve representative farms. Positive Mathematical Programming (PMP) is applied. First, shadow prices of fixed inputs are obtained for each farm from a linear program (LP) forcing base year (1994) net output and fixed input allocations. Second, the Maximum Entropy (ME) technique is used to recover the restricted profit functions. The model purely reproduces observed net output and fixed input data. A short run profit function is derived for the region from aggregation of the model. The corresponding long run profit function is also derived. The profit model reveals an inelastic response to prices in the short run, and a more elastic response in the long run. Nitrogen and water appear as complements. The inelasticity of nitrogen response to its own price precludes taxing nitrogen to control its use. In contrast, pricing water is an effective strategy, not only to control water use but also nitrogen use. The Water Framework Directive (WFD) recommends both strategies.

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    File URL: http://www.porto.ucp.pt/feg/repec/WP/092008%20-%20Costa%20-%20DATA%20CONFESSION%20IN%20THE%20EDM.pdf
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    Bibliographic Info

    Paper provided by Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto) in its series Working Papers de Economia (Economics Working Papers) with number 092008.

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    Length: 6 pages
    Date of creation: Nov 2008
    Date of revision:
    Handle: RePEc:cap:wpaper:092008

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    Related research

    Keywords: water; agricultural economics; elasticities; positive mathematical programming; maximum entropy;

    This paper has been announced in the following NEP Reports:

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    1. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
    2. Richard E. Howitt, 1995. "A Calibration Method For Agricultural Economic Production Models," Journal of Agricultural Economics, Wiley Blackwell, vol. 46(2), pages 147-159.
    3. Lopez, Ramon E, 1985. "Structural Implications of a Class of Flexible Functional Forms for Profit Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 593-601, October.
    4. Lau, Lawrence J., 1976. "A characterization of the normalized restricted profit function," Journal of Economic Theory, Elsevier, vol. 12(1), pages 131-163, February.
    5. Alfons Oude Lansink & Geert Thijssen, 1998. "Testing among functional forms: an extension of the Generalized Box-Cox formulation," Applied Economics, Taylor & Francis Journals, vol. 30(8), pages 1001-1010.
    6. Quirino Paris & Richard E. Howitt, 1998. "An Analysis of Ill-Posed Production Problems Using Maximum Entropy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 124-138.
    7. Golan, Amos & Judge, George G. & Miller, Douglas, 1996. "Maximum Entropy Econometrics," Staff General Research Papers 1488, Iowa State University, Department of Economics.
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