Processing Industry Capacity and the Welfare Effects of Sugar Policies

Abstract

Normally, analysis of policies affecting commodities such as sugar employs long‐run comparative statics under certainty and ignores processing industries like cane‐sugar refining, under the implicit assumption that the capital is malleable in both the short and long run. We present a dynamic model, calibrated to world sugar and solved with numerical dynamic programming, that includes the specific capital of the refining industry. When compared to an otherwise identical static model, the dynamic model suggests that some 20% of welfare losses may be misattributed to cane‐sugar producers instead of refiners. In contrast, the difference between certainty and uncertainty proves to be unimportant.

Keywords: depreciation, dynamic programming, processing industry, short run, sugar policy, Q180