IV. EMPIRICAL ESTIMATION OF THE POLICY ANALYSIS MATRIX

VIII. CONSTRUCTING PAMS FOR COMMODITY SYSTEMS

This chapter presents a framework for empirical estimation of the PAM. Estimation of the elements in the first row of the matrix-private revenues, costs, and profits-is straightforward. The numbers in this row are based on direct observation of actual revenues and costs in existing commodity systems. But calculation of the second row-social revenues, costs, and profits-is more complex. The analyst is asked to evaluate the effects on production systems of policies and market failures, thus altering the observed values of revenues and costs. A further complication for empirical estimation arises because commodity systems are composed of a set of activities-production, processing, and marketing. These activities represent the unit of observation, and commodity systems are aggregations of the costs and returns to each activity. The following section elaborates on these aspects of the estimation exercise.

The chapter also considers issues in the organization and presentation of budget data. The first task for the development of the PAM is to select systems that are closely related to the policy issues of interest. In this identification process, decisions are made about farm production, movement of the commodity from the farm to the processor, processing, and transport to a wholesale market. Because the PAM uses both private and social prices for inputs and outputs, cost and returns information is disaggregated in two ways. First, quantity and unit price data are usually necessary for estimation of social costs and returns. Second, private costs are classified into four categories-labor, capital, land, and tradable inputs-so that the analyst can identify the impact of divergences on social costs of production.