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GTAP Resource #983

"Endogenous adjusted Output Quotas - The Abolishment of the Raw Milk Quota in the European Union"
by Lips, Markus and Peter Rieder

To depict an output quota in the GTAP model (Hertel and Tsigas) the currently used approach fixes the output quantity exogenously. The resulting quota rent adjusts endogenously. In the paper an approach is suggested which enables the endogenous adjustment of both the produced quantity and the quota rent. The approach is based on the GTAP technical paper no. 4 by Bach and Pearson.
The quota rent is interpreted as additional earnings of the factors used. This means that factor payments in sectors with output quotas consist of a minimal necessary factor payment and an additional factor payment. The sum of the additional payments of all factors is equivalent to the quota rent. Looking at the GTAP data base the quota rent is included in the factor payments. Consequently, analyzing an output quota requires no change of the data base.

Two additional coefficients are required for those sectors which have an output quota. The coefficient TQ indicates the relationship between the output price without quota rent and the output price with quota rent. This coefficient facilitates the calculation of the quota rent and the additional payments of the factors. The second coefficient (QO) shows the relationship between the produced quantity and the quota quantity. Both coefficients have a maximum value of 1 and are needed for the modeling of the quota mechanism (Bach and Pearson), which must be introduced in the GTAP model.
Two further modifications of the model are needed. Firstly, the value of output at agents price (VOA) at which the zero profit condition normally holds, includes the minimal necessary factor payments as well as the additional factor payments resp. the quota rent. Consequently, the zero profit condition is changed to the output value without quota rent. Secondly, all additional factor payments belong to the regional income. A modification of the regional income is needed replacing the additional factor payments by the quota rent. Thus a change in the quota rent affects the regional income. All these model adjustments ensure that we attain a general equilibrium. Finally, no adjustment of factor markets is required because the quota rent does not generate any change in behaviour with regard to factor use. The producing sector would use the same quantities of factor inputs regardless of whether it receives a quota rent or not.

The coefficient TQ is derived from literature. It is advisable to vary this coefficient using the systematic sensitivity analysis by Arndt and Pearson. Besides the results the model calculates also the corresponding standard deviations.

In the European Union the raw milk production is limited by an output quota. Since some member countries would like to eliminate it, the suspension of the raw milk quota is analyzed. The results show that the produced raw milk quantities remain stable in the member countries. The produced quantity increases solely in the Netherlands. The raw milk prices of the European Union countries decrease by 15% to 30%. The corresponding standard deviations lie between 4 and 6%.


Arndt, C. and K. R. Pearson. (1998). How to carry out Systematic Sensitivity Analysis via Gaussian Quadrature and GEMPACK. GTAP Technical Paper 3.

Bach, C. F. and K. R. Pearson. (1996). Implementing Quotas in GTAP Using GEMPACK or How to Linearize an Inequality. GTAP Technical Paper 4.

Hertel, T. W. and M. E. Tsigas. (1997). Structure of GTAP. In T. W. Hertel. Global Trade Analysis Modeling and Applications: 13-73. Cambridge University Press. New York.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2002 Conference Paper
Status: Published
By/In: Presented at the 5th Annual Conference on Global Economic Analysis, Taipei, Taiwan
Date: 2002
Created: Lips, M. (4/25/2002)
Updated: Bacou, M. (7/16/2002)
Visits: 3,800
- Domestic policy analysis
- Agricultural policies
- European Union

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