AN ECONOMETRIC EVALUATION OF THE TAIWAN BANANA STABILIZATION FUND PLAN WITH POLICY IMPLICATIONS FOR PRICE STABILIZATION

CHIANG-REN SHOW, Purdue University

Abstract

Change in farm price can be separated into a "systematic" component and a "random" component. The stabilization fund program uses market equilibrium price as the guaranteed price instead of farmers' inappropriate price expectations to eliminate price or income variation caused by the "systematic" component. This program also can eliminate the price variation cause by the "random" component through stabilization fund. The principal objectives of this thesis were to study the impact of the stabilization fund program on farm price variation and farm income and to investigate the methods of estimating the guaranteed price level. Consider a market in which demand and supply are described by the linear relations. In the demand side, price is set as a dependent variable. Further, we assume both random terms in the demand and supply are jointly normally distributed with means equal to zero, variance (sigma)(,U)('2) and (sigma)(,V)('2) and covariance equal to zero. In this case, if guaranteed price is set at the mean value of farm price, the stabilization fund program can decrease price variation and increases both farm income and producers's surplus. Furthermore, the greater the variance of demand and supply, the greater effect stabilization has on decreasing variance and increasing farm income and producer surplus. This applies when supply is elastic and demand inelastic. An econometric model of the Taiwan banana industry was developed for the empirical study. Stochastic simulation was used. The results support the theoretical results--the stabilization fund program can increase farm income and decreases farm price variation. We also evaluated the Taiwan banana stabilization fund program during 1977-1984. The results reveal that the stabilization fund program can eliminate price variation and make resource allocation optimal. But most of the income variation remains. Some methods even increase income variation. The main reason is that the stabilization program is unable to eliminate the random change in production. In the evaluation of methods estimating the guaranteed price, the production cost methods are not superior to moving average methods in terms of increasing farm income in the case of the Taiwan banana industry 1977-1984. The main problem of production cost method is the estimation of normal profit.

Degree

Ph.D.

Subject Area

Agricultural economics

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