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Application of the Inverse Almost Ideal Demand System to Welfare Analysis

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Author Info

  • Frank Jensen

    ()
    (Institute of Local Government Studies, Denmark)

  • Max Nielsen

    ()
    (Danish Research Institute of Food Economics, Fisheries Economics and Management Division)

  • Eva Roth

    ()
    (Department of Environmental and Business Economics, University of Southern Denmark)

Abstract

This paper presents the theoretical properties of the Inverse Almost Ideal De-mand System and applies the system on time series data for cod, herring and plaice in Denmark (1986 to 2001). Furthermore, the shortcoming of the Inverse Almost Ideal Demand System when applied to welfare analysis is discussed. The properties of the demand system show that - since the demand system is a second-order approximation to the true system - it does not have global appli-cability for welfare measurement. It may, therefore, not satisfy the conditions for calculation of consumer surplus (negative slope and positive point of inter-section with the price-axis). The theoretical point is illustrated by an empirical example of the Danish fish market. Using a vector auto regressive model in er-ror correction form to overcome the problem of non-stationarity of data, the In-verse Almost Ideal Demand System is estimated. For cod the intercept is nega-tive and for herring and plaice the slope of the demand function is positive in the data interval investigated. Thus, the estimated demand system is not suitable for welfare analysis.

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File URL: http://www.sdu.dk/~/media/Files/Om_SDU/Institutter/Miljo/ime/wp/roth43.ashx
File Function: First version, 2003-07
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Bibliographic Info

Paper provided by University of Southern Denmark, Department of Environmental and Business Economics in its series Working Papers with number 43/03.

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Length: 32 pages
Date of creation: Jul 2003
Date of revision:
Handle: RePEc:sdk:wpaper:43

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Related research

Keywords: Inverse Almost Ideal Demand System; Welfare analysis; Co-integration and Fish;

References

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  1. Eales, James S. & Unnevehr, Laurian J., 1994. "The inverse almost ideal demand system," European Economic Review, Elsevier, vol. 38(1), pages 101-115, January.
  2. Diewert, W.E., 1993. "Duality approaches to microeconomic theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 12, pages 535-599 Elsevier.
  3. James Eales & Catherine Durham & Cathy R. Wessells, 1997. "Generalized Models of Japanese Demand for Fish," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1153-1163.
  4. M. Ben Kaabia, 2001. "Estimation and inference in cointegrated demand systems: an application to Tunisian meat consumption," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 28(3), pages 349-370, October.
  5. M. Hashem Pesaran & Yongcheol Shin, 2002. "Long-Run Structural Modelling," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 49-87.
  6. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  7. Wilen, James E., 2000. "Renewable Resource Economists and Policy: What Differences Have We Made?," Journal of Environmental Economics and Management, Elsevier, vol. 39(3), pages 306-327, May.
  8. Carson, Richard T. & Hanemann, W. Michael, 2006. "Contingent Valuation," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 17, pages 821-936 Elsevier.
  9. Deaton, Angus, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 391-405, July.
  10. Hayes, Dermot J. & Wahl, Thomas I. & Williams, Gary W., 1990. "Testing Restrictions on a Model of Japanese Meat Demand," Staff General Research Papers 10940, Iowa State University, Department of Economics.
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Cited by:
  1. Max Nielsen & Frank Jensen & Eva Roth, 2004. "A Cost-Benefit Analysis of a Public Labelling Scheme of Fish Quality," Working Papers 53/04, University of Southern Denmark, Department of Environmental and Business Economics.

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