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Abstract

Standard deterministic analysis of agricultural and biofuel policies can yield incomplete or misleading results. Stochastic analysis is especially important when policies have asymmetric effects and when there is intrinsic interest in uncommon events or the distribution of possible outcomes. The paper examines four recent cases where a stochastic approach was critical to a complete and balanced examination of important US policy issues. In each case, a stochastic model of the US agricultural and biofuel sectors was used to estimate 500 sets of possible market outcomes for the 2007- 2016 period. Changes in support levels, a proposed revenue-based program, possible World Trade Organization limits on internal support measures, and biofuel use mandates are all found to have potential impacts that could have been missed by traditional deterministic analysis. A stochastic approach could also be valuable in looking at EU policy questions such as possible reductions in intervention prices and export subsidies.

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