Shadow Pricing Market Access: A Trade Benefit Function Approach

ZEF Discussion Papers on Development Policy No. 121

60 Pages Posted: 10 Mar 2008

See all articles by Nancy H. Chau

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Rolf Färe

Oregon State University - Department of Economics

Date Written: June 2008

Abstract

Appropriate assessment of the social value of market access is at the core of a broad range of inquiries in trade research. A selection include: the appraisal of industry-level production and consumption distortions due to selective trade liberalization and partial tax reform; the construction of national-level quantity indicators of market access consistent with welfare change, and the use of international trade re-balancing as sanctions to discourage trade agreement violations, or as compensation in trade dispute settlement. In order to obtain shadow prices, we propose a new approach integrating the Luenberger benefit function and the directional output distance function. This yields a trade benefit function which represents trade preferences à la Meade in the context of a canonical general equilibrium model of trade. We first show that our approach is in keeping with well-established and commonly used measurement techniques of trade welfare, for the standard trade expenditure function is in fact dual to the trade benefit function. We then show that this dual relation allows for a direct retrieval of the shadow values of net imports from the trade benefit function. The usefulness and operationality of our approach is then demonstrated in a series of applications and simulations.

Suggested Citation

Chau, Nancy H. and Färe, Rolf, Shadow Pricing Market Access: A Trade Benefit Function Approach (June 2008). ZEF Discussion Papers on Development Policy No. 121. Available at SSRN: https://ssrn.com/abstract=1104683 or http://dx.doi.org/10.2139/ssrn.1104683

Nancy H. Chau (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Rolf Färe

Oregon State University - Department of Economics ( email )

303 Ballard Extension Hall
Corvallis, OR 97331
United States
541-737-8184 (Phone)
541-737-5917 (Fax)

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