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The demand for milk in British Columbia : estimation and implications Kassam, Shinan N.


In this paper, we estimate dynamic versions of the Almost Ideal Demand System and the Linear Expenditure System in order to obtain an estimate of the demand elasticity for milk in British Columbia. This parameter has, to our knowledge, never been estimated for one province, but given the ongoning interest by the B.C. dairy industry in obtaining a larger allocation of Market Share Quota (MSQ), which is now allocated as a function of fluid milk consumption, it is timely to estimate the elasticity of demand for milk in British Columbia. Many have argued that the retail price of milk in B.C. is too high, especially when compared to prices in other western provinces, as well as the neighbouring State of Washington. The argument is that significant increases in consumption, and thereby increased allocation of MSQ could be achieved through decreases in prices. However, this depends upon the elasticity of demand which we herein estimate. Our estimate of the elasticity of demand for milk in British Columbia is -0.33, as estimated from the dynamic Almost Ideal System, and -0.40 from the dynamic Linear Expenditure System. We note that the dynamic Linear Expenditure System estimated in this study was statistically significant and met all theoretical restrictions, in particular quasi-concavity of the utility function at each observation point. We note, however, that this elasticity estimate may be interpreted as a short run estimate owing to our limited time frame for analysis. Clearly, with an elasticity estimate in the order of -0.40, "significant" increases in consumption cannot be achieved solely through decreases in prices. This paper, however, does more than simply relay elasticity estimates, for it also provides tips and techniques for estimating demand systems such as those estimated in this paper. These strategies are typically not found in textbooks or journal articles, and as such can be of great use to those estimating demand systems for the first time. In addition, this study makes use of a regional data source that has previously been unavailable to applied economists. Those who have attempted to estimate the demand for milk regionally have found that Statistics Canada does not publish regional consumption figures for most commodities. This is particularly true for the consumption of beverages in British Columbia. The data for this study were obtained privately and statistically represent bi-monthly sales of beverages in British Columbia. Thus, this paper is the first to estimate the demand for milk in British Columbia by using a demand systems approach employing data obtained from a private source (i.e. not Statistics Canada or other public sector organisations).

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