Using the Trans-log Expenditure Function to Endogenize New Market Access in Partial Equilibrium Models

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Virginia Tech. Global Issues Initiative


While Constant Elasticity of Substitution (CES) utility functions are a common choice in empirical partial and general equilibrium models because they are parsimonious in the number of model parameters, they are not well suited for cases where the consumption of a given could equal zero. This is because the uncompensated demand functions derived from a CES utility function will equal zero only if the price of that good is equal to infinity or the shift parameter in the utility function for that good is equal to zero (e.g., consumers do not wish to consume that good). In order to allow for the possibility of zero consumption, a preference structure must allow for the underlying “demand curve” to intersect the price axis. This will be important when assessing the effect of new market access for a particular good. In that case, initial consumption is equal to zero because of the existing policy. After a change in policy, the good may or may not be sold in a particular region or season if its price is less than the consumers’ reservation price for that good. The purpose of this draft is to develop a preference structure that allows for zero consumption and how it could be implemented to assess the impact of new market access.