Supply response and market imperfections: The implicatios for welfare analysis

In this thesis we investigate the supply side of farm households in the Tanzanian region of Kagera and incorporate the results into a welfare analysis of price shocks and trade policy options. The first chapter discusses the relevance of agriculture as an engine of growth and poverty reduction and introduces the context and the data used for the empirical analysis. The second chapter tests for separability of the households demand and supply sides and then estimates supply functions for the main crops. We find that separability cannot be rejected for this sample and that farmers are only partially responsive to price incentives. The third chapter analyses the role of market participation decisions and transaction costs for food supply. We find that transaction costs play an important role in households supply decisions. Moreover, we show that there is a positive although small supply response to prices once controlling for the unresponsiveness of self-sufficient households. The fourth chapter extends the standard welfare impact analysis of price shocks to incorporate supply and demand responses as well as the role of market participation and transaction costs. We find that the results are sensitive to the introduction of households’ output, wage and consumption responses.