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A simulation analysis of alternative stabilization schemes for the British Columbia hog industry Palacios, Alejandro


Given the British Columbia Government goal of income stability for hog producers, the major objective of this study was to estimate the budgetary cost to the provincial government and effectiveness of the Farm Income Assurance Program (FIAP) and alternative schemes in achieving this goal. To accomplish this objective, it was necessary to build a mathematical model incorporating the main features of the British Columbia hog industry and capable of simulating the operation and consequences of a variety of stabilization schemes. Modelling of the British Columbia hog industry posed a number of difficulties. Overcoming these difficulties required a combination of economic theory and empirical knowledge. The basic assumption underlying the hog model was that British Columbia hog production represents a minor component of the Canadian and North American market. This assumption implies that British Columbia hog producers face a perfectly elastic demand function. Thus, hog prices could be treated as exogenous, implying that any increase in production, due to a shift in the supply function to the right, would be absorbed by the market with no effect on hog prices. Later a set of production assumptions and different alternative schemes designed to stabilize producer income were incorporated into the model. Given that the objective of this study was not to determine an optimal stabilization program, because of the lack of knowledge of the objective function of policy makers, but rather to evaluate costs and effects of alternative stabilization schemes, simulation was chosen as the research method. When the mathematical model was completed it was translated into the computer model and the first step was to validate it. Historical validation was possible because the FIAP has been in operation since January 1974. Although the model was built to be as flexible and general as possible, and was able to handle several different alternative stabilization schemes, this study reports results for only three of them: (1) Farm Income Assurance Program; (2) Modified Farm Income Assurance Program; and (3) Premium-Subsidy Scheme. The analysis of the results began with a single run for each scheme, in order to determine its effects. Later, a detailed comparative analysis that involved changing one parameter value at a time was undertaken to assess the contribution of each parameter to the policy objective of income stability. Finally, a series of simulation runs was performed and performance functions were estimated to allow more general conclusions to be drawn. To achieve income stability a premium/subsidy scheme was shown to be preferable to FIAP, because it collects farmer premiums in a stabilizing way. To the extent that reduced government cost is a goal, FIAP can be modified in a number of ways, including a sliding farmer premium.

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