Estimating Producer Welfare When Input and Output Prices Change Simultaneously

Michael R. Metzger
Working Paper:

This paper develops a measure for the change in producer welfare when both factor and product prices are changed simultaneously. Such a measure is useful when performing economic analysis of proposed policy changes affecting two vertically-related industries. For example, in previous examinations of the social benefits to rescinding tariff and quota protection of domestic textile and apparel industries, one common approach has been to employ a comparative static analysis of the gains to trade liberalization in the two industries separately. Simply adding the gains calculated separately for trade liberalization in the two vertically related industries involves a potentially significant overestimation error. The more appropriate approach would be to analyze the gains to trade liberalization when trade restraints are removed from both industries. This necessitates estimating the net gain/loss to downstream producers as the prices of their input and product both fall as a direct result of trade liberalization.