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Effects of transaction costs on supply response and marketed surplus

  • Minot, Nicholas

This paper explores the effect of transaction costs on aggregate supply and demand and marketed surplus. A five-good non-separable household model is used to illustrate the effect of transaction costs on a generic African household. Then, the paper examines the aggregate behavior of a market consisting of 50 such households with varying production capacities. The simulations reveal that transaction costs not only decrease market surplus but that they can substantially reduce the elasticity of supply and demand. Under other circumstances (when almost all households are net sellers), transaction costs can also make supply and demand more elastic. Finally, the results show that transaction costs generally increase the price elasticity of marketed surplus. The implications for research in agricultural marketing are discussed.

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Paper provided by International Food Policy Research Institute (IFPRI) in its series MTID discussion papers with number 36.

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Date of creation: 1999
Date of revision:
Handle: RePEc:fpr:mtiddp:36
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  1. David E. Bloom & Jeffrey D. Sachs, 1998. "Geography, Demography, and Economic Growth in Africa," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 207-296.
  2. Lofgren, Hans & Robinson, Sherman, 1999. "To trade or not to trade: non-separable farm household models in partial and general equilibrium," TMD discussion papers 37, International Food Policy Research Institute (IFPRI).
  3. Binswanger, Hans & Yang, Maw-Cheng & Bowers, Alan & Mundlak, Yair, 1987. "On the determinants of cross-country aggregate agricultural supply," Journal of Econometrics, Elsevier, vol. 36(1-2), pages 111-131.
  4. Steven Were Omamo, 1998. "Transport Costs and Smallholder Cropping Choices: An Application to Siaya District, Kenya," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 116-123.
  5. Rutherford, Thomas F., 1995. "Extension of GAMS for complementarity problems arising in applied economic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1299-1324, November.
  6. Jayne, T S, 1994. "Do High Food Marketing Costs Constrain Cash Crop Production? Evidence from Zimbabwe," Economic Development and Cultural Change, University of Chicago Press, vol. 42(2), pages 387-402, January.
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