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Application of supply response and input demand theory: The case of Indonesian price support of paddy
Abstract
In 1968, the Indonesian government introduced the rice intensification program aimed at stimulating adoption of new technologies in rice production. The program has been successful in increasing rice yields over time. The rice intensification program includes a price support policy for rice and a credit package consisting of provisions for cash, fertilizers, seeds and pesticides, as well as providing production information and assistance to farmers by the government's extension services. The objectives of this study are: (1) examine responsiveness of rice farmers in Indonesia to changes in output and input prices, (2) estimate paddy incomes for farmers, and (3) utilize estimated elasticities to evaluate pricing policy by the Indonesian government. Pooled time series and cross sectional data were obtained from agricultural survey publications for the time period 1971-1984 published by the Central Bureau of Statistics in Indonesia. Using duality theory, cost share and revenue share equations were estimated simultaneously using Zellner's efficient estimation technique. Elasticities of supply and input demands were then derived. The empirical results of this study indicate that parameter estimates for supply elasticities are positive and inelastic, consistent with a priori expectations. Most parameter estimates of the own price elasticity of demand for inputs have negative signs. The estimated cross price elasticities of demand suggest that labor is a substitute for pesticides, fertilizers and bullocks. Using the estimated results and data for 1970-1986, the floor price for paddy is calculated. The derived results indicate that the floor price for rice, set by the government over this time period, is too low. The estimated results do provide information, usable by the Indonesian government in formulating future pricing programs and policies for rice. The methodological framework developed in this study can be applied to other commodities in Indonesia and to other countries having similar governmental programs.
Subject Area
Agricultural economics
Recommended Citation
Sugiyanto, Wahyudi, "Application of supply response and input demand theory: The case of Indonesian price support of paddy" (1987). ETD collection for University of Nebraska-Lincoln. AAI8803772.
https://digitalcommons.unl.edu/dissertations/AAI8803772