Dangers
Download
1 / 55

David S. Bullock University of Illinois Dept. of Consumer and Agricultural Economics - PowerPoint PPT Presentation


  • 87 Views
  • Uploaded on

Dangers of Using Political Preference Functions in Political Economy Analysis: Examples from U.S. Ethanol Policy. David S. Bullock University of Illinois Dept. of Consumer and Agricultural Economics. Paper prepared for presentation at the 16 th ICABR Conference,

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' David S. Bullock University of Illinois Dept. of Consumer and Agricultural Economics' - andrew-slater


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
David s bullock university of illinois dept of consumer and agricultural economics

Dangers of Using PoliticalPreferenceFunctions in Political Economy Analysis:Examples from U.S. Ethanol Policy

David S. Bullock

University of Illinois Dept. of Consumer and Agricultural Economics

Paper prepared for presentation at the

16th ICABR Conference,

‘The Political Economy of the Bioeconomy: Biotechnology and Biofuel’

June 26, 2012

Ravello, Italy


Rausser and freebairn 1974
Rausser and Freebairn(1974)

I. PPF

Political preference functionapproach.

  • Empirically measure political power of interest groups.


Many studies followed
Many studies followed:

  • Paarlberg and Abbott (1986)

  • Lianos and Rizopoulos 1988)

  • Oehmke and Yao (1990)


And continue to be published
And continue to be published:

  • Rausser and Goodhue (2002)

  • Redmond (2003)

  • Simon et al. (2003)

  • Burton, Love, and Rausser (2004)

  • Atici (2005)

  • Atici and Kennedy (2005)

  • Lence et al. (2005)

  • Lee and Kennedy (2007)

  • Francois, Nelson, and Pelkmans-Balaoing (2008)

  • Rausser and Roland (2008)

  • Ahn and Sumner (2009)


Typical results
Typical Results

“Group A was 2.72 times as powerful as group B.”


David s bullock university of illinois dept of consumer and agricultural economics
Two decades ago, von Cramon-Taubadel (1992) and then Bullock (1994) published serious critiques of the PPF method.


But obviously they had little impact on the literature
But, obviously, they had little impact on the literature (1994) published serious critiques of the PPF method.





David s bullock university of illinois dept of consumer and agricultural economics

The model is every bit as rich and descriptive of U.S. ethanol policy as are several that have recently been published in ag econ journals.



David s bullock university of illinois dept of consumer and agricultural economics
I didn models.’t design this model with PPF methodology in mind. It’s just a model, like many other models in the policy literature.


David s bullock university of illinois dept of consumer and agricultural economics

Multi-market, multi-policy-instrument model models.

I illustrate my arguments with a multi-market, multi-policy-instrument, partial equilibrium model of the U.S. ethanol policy.

II. The Model


David s bullock university of illinois dept of consumer and agricultural economics

Crude Oil models.

Refinery-specific

capital and labor

Ethanol-specific

capital and labor

Corn-specific

land, capital,

labor

Livestock-specific

land, capital,

labor

Biofuel

Petrofuel

“Fuel”

Meat

Labor (taxed for government revenues)


Policy instruments modeled
Policy Instruments Modeled: models.

Ten independent policy instruments

tb, per-unit tax/subsidy on biofuel

tg, per-unit tax/subsidy on petrofuel (gasoline)

tc, per-unit tax/subsidy on corn

to, per-unit tax/subsidy on crude oil

tr, per-unit tax/subsidy on refiners and distributors

ta, per-unit tax/subsidy on ethanol-specific resources

tl, per-unit tax/subsidy on non-corn meat input resources (livestock)

tf, per-unit tax/subsidy on fuel (retail)

tm, per-unit tax/subsidy on meat

qbman, (producers of “fuel” must use some minimum amount of biofuel)


One dependent policy instrument t w tax on labor biofuels policy must be paid for
One models.dependent policy instrument: tw (tax on labor). Biofuels policy must be paid for.


Interest groups
Interest groups models.

At most disaggregated:

  • Corn suppliers

  • Crude oil suppliers

  • Oil Refiners/Distributors

  • Suppliers of ethanol-specific resources (think ADM)

  • Livestock suppliers

  • Labor suppliers (“employees”)

  • Labor demanders (“employers”)

  • Consumers of fuel and meat


Leontief production technologies goods produced by zero profit firms

Biofuel models.

Petrofuel

Meat

qcb

qcm

qr

Corn to biofuel

Refining and distribution

Corn to meat

qa

ql

qo

Non-corn biofuel resources

Livestock

Crude oil

Leontief production technologies (goods produced by zero-profit firms):


David s bullock university of illinois dept of consumer and agricultural economics
Simple model of fuel production: petrofuel and biofuel are perfect substitutes in the production of “fuel.”

Fuel

qg

Petrofuel

qb

Biofuel


Feasible welfare manifolds
Feasible Welfare Manifolds perfect substitutes in the production of

Concept central to understanding PPF methodology: welfare manifolds.

I discuss feasible welfare manifolds in detail in another paper.


Framework
Framework perfect substitutes in the production of

n+1 interest groups:

Group 0: government

Groups 1, …, n: other interest groups


Government s strategies involve policy instruments

x perfect substitutes in the production of 2

(Production mandate)

X, set of feasible policies

x1

Per-unit biofuels subsidy (tax if < 0)

A particular policy

Government’s strategies involve policy instruments


A vector of market parameters supply and demand elasticities perhaps
A vector of market parameters , perfect substitutes in the production of (supply and demand elasticities, perhaps)


Group i s welfare depends on government policy
Group perfect substitutes in the production of i’s welfare depends on government policy:

ui = hi(x,),i = 0,1, … , n.


Payoff vector function h maps set of feasible policies into welfare space
Payoff vector function h maps set of feasible policies into perfect substitutes in the production of “welfare space.”

u = h(x, ) =

(h0(x, ), h1(x,),…, , hn(x,))


David s bullock university of illinois dept of consumer and agricultural economics

Every place the government can send the interest groups perfect substitutes in the production of

u2

h(x´)

H{1,2}(X)

u1

x2

h(x)

X

x1

“feasible welfare manifold”

{1,2} here is the set of utility-bearing groups


David s bullock university of illinois dept of consumer and agricultural economics
Welfare manifolds are a generalization of Josling perfect substitutes in the production of ’s (1974) and Gardner’s (1983) surplus transformation curves.


David s bullock university of illinois dept of consumer and agricultural economics

perfect substitutes in the production of feasible welfare manifold”

“feasible welfare submanifold”

u2

x2

H{1,2}(T)

h(x´)

T

X

H{1,2}(X)

x1

u1

{1,2} here is the set of utility-bearing groups


Iii ppf results using the model a one policy instrument two interest groups
III. PPF Results using the model perfect substitutes in the production of A. One policy instrument, two interest groups


David s bullock university of illinois dept of consumer and agricultural economics

perfect substitutes in the production of Everybody else’s” welfare

Status quo policy result:

(∆U1, ∆U2) = (0, 0)

Increase ethanol tax or decrease ethanol subsidy

Corn farmer/ethanol producer welfare

If in PPF model we assume ethanol tax/subsidy is the only instrument:

Decrease ethanol tax or increase ethanol subsidy


David s bullock university of illinois dept of consumer and agricultural economics

Political power weights: perfect substitutes in the production of

Corn/ethanol industry: 0.514

Everyone else: 0.486

PPF weights would be:

Farmers/ethanol producers: 0.514

Everyone else: 0.486

“Everybody else’s” welfare

Corn farmer/ethanol producer welfare

Slope = -1.059

Interpretation: “The corn/ethanol industry is just a little bit more powerful than the rest of society.”


David s bullock university of illinois dept of consumer and agricultural economics

Say we had observed an ethanol tax of $1.00/gal. What would our PPF method say that the political power weights were?

“Everybody else’s” welfare

B

Corn farmer/ethanol producer welfare

Slope = -0.93

Political Power Weights

Corn/ethanol industry: 0.482

Everybody else: 0.518

Because their weight droped by 0.03, corn/ethanol industry loses about $23 billion.


David s bullock university of illinois dept of consumer and agricultural economics

Say we had observed an ethanol subsidy of $1.50/gal. What would our PPF method say that the political power weights were?

“Everybody else’s” welfare

Slope = -1.22

Corn farmer/ethanol producer welfare

Political Power Weights

Corn/ethanol industry: 0.551

Everybody else: 0.449

Compared to status quo, corn/ethanol industry gains about $42 billion.

C

D


David s bullock university of illinois dept of consumer and agricultural economics
So what seems like a fairly small change in political power weights leads to a huge change in transfers!


David s bullock university of illinois dept of consumer and agricultural economics

weights leads to a huge change in transfers!Everybody else’s” welfare

Corn farmer/ethanol producer welfare

Reason: the welfare submanifold is nearly linear.


What if instead of looking at the ethanol tax subsidy we decided to look at the gasoline tax
What if instead of looking at the ethanol tax/subsidy, we decided to look at the gasoline tax?


David s bullock university of illinois dept of consumer and agricultural economics

What decided to look at the gasoline tax?’s going on? Higher gas tax allows a lower labor tax, less distortion.

To a point, raising the gasoline tax improves the welfare of both groups!

Status quo


David s bullock university of illinois dept of consumer and agricultural economics

But decided to look at the gasoline tax?“negative” political power weight means that government can’t be solving the max problem.

Positive slope!




David s bullock university of illinois dept of consumer and agricultural economics

but hurts everyone else.True” political power

Your measurement of political power

A little weird: surplus transformation curve is not concave. If you measure the slope to get a political power measurement, you may be using the wrong measure, because the actual solution might be a corner solution.


David s bullock university of illinois dept of consumer and agricultural economics

but hurts everyone else.Everybody else’s” welfare

Using instruments separately

petrofuel tax/subsidy

Corn farmer/ethanol producer welfare

biofuel use mandate

biofuel tax/subsidy

Better question: how are these instruments best combined?

Is that even a very good question?

Is one of these instruments “better” than the others?


David s bullock university of illinois dept of consumer and agricultural economics

Also, it should be clear that the political power measure obtained from PPF methodology very much depends on which instruments are modeled.


B two instruments two interest groups
B. Two instruments, two interest groups obtained from PPF methodology very much depends on which instruments are modeled.


David s bullock university of illinois dept of consumer and agricultural economics

“Everybody else’s” welfare

Corn farmer/ethanol producer welfare

Result: 2-dimensional welfare manifold


David s bullock university of illinois dept of consumer and agricultural economics

Most PPF studies just assume away this problem by having the number of interest groups be 1 more than the number of policy instruments in their models.

“Everybody else’s” welfare

But then the “observed” policy outcome will almost never be Pareto efficient, and therefore you can’t get PPF weights.

Corn farmer/ethanol producer welfare


C three instruments two interest groups
C number of interest groups be 1 more than the number of policy instruments in their models.. Three instruments, two interest groups


David s bullock university of illinois dept of consumer and agricultural economics

number of interest groups be 1 more than the number of policy instruments in their models.Everybody else’s” welfare

  • Instruments used simultaneously:

  • biofuel tax/subsidy

  • petrofuel tax/subsidy

  • biofuel use mandate

Corn farmer/ethanol producer welfare

If we allow the third instrument to be used, and our model has two interest groups, this just expands the welfare manifold, and we still can’t get PPF weights from the observed policy.


D two instruments three interest groups
D. Two instruments, three interest groups number of interest groups be 1 more than the number of policy instruments in their models.


David s bullock university of illinois dept of consumer and agricultural economics

And if we disaggregate the interest groups a little more, it changes the whole picture: a 2-dimension manifold in 3-space: Now we can get PPF weights again…

Welfare submanifold when only the petrofuel tax/subsidy and the biofuel tax/subsidy are used


E three instruments three interest groups
E changes the whole picture: a 2-dimension manifold in 3-space: Now we can get PPF weights again…. Three instruments, three interest groups


David s bullock university of illinois dept of consumer and agricultural economics

changes the whole picture: a 2-dimension manifold in 3-space: Now we can get PPF weights again…Everybody else’s” welfare

Corn farmer/ biofuel producer welfare

unon-intervention

Petrofuel producers’ welfare

Allowing the use of another policy instrument changes the whole picture again. Now we have 3 instruments and 3 interest groups. Again, an “observed” policy will take us to an interior point in the welfare manifold. Result: Can’t get PPF weights.


Conclusions
Conclusions changes the whole picture: a 2-dimension manifold in 3-space: Now we can get PPF weights again…

  • The best way to measure the “political power” of interest groups is by examining the sizes of the transfers brought about by policy, not by measuring the slopes of a contrived surplus transformation manifold at a contrived “observed” point.


Conclusions1
Conclusions changes the whole picture: a 2-dimension manifold in 3-space: Now we can get PPF weights again…

  • Like this: “Group A received $x, which was taken from group B, which lost $y.”

  • Not this: “Group A’s political power weight is 0.xx and group B’s is (1 – 0.xx).”