Animal health economics Flashcards
Production function
Describes reationship between inputs and outputs. Typically non-linear (exponential - diminishing returns at higher levels in input). Optimum is when slope = 1 (1 unit increase in input leads to 1 unit increase in output). When slope is less than 1, 1 unit increase in input leads to less than 1 unit increase in output.
Economic tools - application (3), methods (5)
- Describe and compare overall profitability of enterprise (over period of 1 year)
* Gross margin analysis - Describe and compare economic impact of introducing a change to a program or policy (e.g. control measure) to an enterprise (over 1 year)
- No need to incorporate likelihood of event occuring (e.g. endemic diseases): partial farm budget
- Need to incorporate likelihood of event occuring (e.g. sporadic/epidemic diseases): pay-off tables, decision trees
- Describe and compare economic impact of introducing a change to a program or policy (e.g. control measure) over more than 1 year - need to factor in the time value of money (discounting)
* Cost-benefit analysis
Gross margin analysis - application, example, method
Gross margin = Output - Variable costs
Used to evaluate and compare profitability of different enterprises (e.g. livestock vs crops, cattle vs sheep enterprise). Each gross margin is a single point on an enterprise production function. Example: impact of FMD on dairy vs pig vs beef vs sheep enterprises in UK.
- Outputs, include all animals and produce sold and purchased:
- animals and produce “out” e.g. sales of products/animals, home consumption, gifts of animals used for payment (values are positive)
- animals and produce “in” e.g. livestock purchases, gifts of livestock received for payments (values are negative)
- Variable (“direct”) costs, include costs which vary in proportion to size of enterprise (not incurred if output is zero) and which can be easily allocated to a particular enterprise e.g. feed, seed, veterinary inputs, casual labour employed for specific purpose
Additional comments:
- Analysis period is usually a year or production cycle (not long-term)
- Collection of gross margins can inform selection of best combination of enterprises (e.g. crops, non-grazing livestock, grazing livestock – where outputs of one enterprise become inputs of other enterprise)
Partial farm budget - application, method
(A + B) > (C + D)
Used to assess economic impact of small changes in farming systems (e.g. control measure or management practice).
- Appropriate when considering an intervention for endemic disease since disease is likely and there is no need to factor in the likelihood of disease occurring (use payoff tables and/or decision trees for sporadic/epidemic diseases)
- Analysis period is usually a year or production cycle (not long-term)
Where benefits include:
A = Increased income e.g. improved meat/milk offtake
B = Reduced costs e.g. decreased condemnation of products, fewer deaths
and costs include:
C = Reduced income e.g. discarded milk due to WHP
D = Increased costs e.g. costs of antibiotics, labour
Interpretation: Intervention is profitable and advantages for the farmer if (A + B) > (C + D)
Additional comments:
- ~Effectively a marginal analysis to show the net increase or decrease in farm income resulting from a proposed intervention (moving along production function).
- Can perform sensitivity analysis to test assumptions about equation inputs (i.e. performance under various scenarios)
Pay-off tables
Used to evaluate and compare different decisions (actions) based on the likelihood of an event occurring and the (financial) consquences were it to occur. Enables estimation of different decision-outcome combinations given the event occurs/doesn’t occur. Sum of columns is the Expected Monetary Value of the decision (action).
Example: control of exotic disease in flock of 100 ewes
- Cost of vaccine: $1/head (100% effective)
- Cost of treatment: $4/head
- Cost of doing nothing: $11/head
- Probability of flock being infected: 0.2 (20% of flocks become infected once disease occurs in area)
Risk-adverse farmer may chose to pay higher cost now for peace of mind of avoiding a more substantial cost later.
Decision trees
Used to depict the chronology of events and evaluate the sequence of decisions. All pay-off tables can also be presented as a decision tree.
Construction of decision tree (constructed from left to right):
- Decision points (nodes) are indicated with a square with branches reflecting mutually exclusive decisions
- Chance nodes are represented with circles with branches reflecting mutually exclusive chance events
- Net benefit identified for each branch, equivalent to the sum of control costs, treatment costs, losses due to disease, etc (all indicated as negative values)
- Most costly option is discarded (indicated with double bar)
- Remaining scenarios are averaged based on probability of event occurring
- Paths not blocked by double bars will yeild the greatest benefit
Cost-benefit analysis - application, problems (5), decision making criteria (3)
Used to assess and compare changes (e.g. project/policy) that are introduced across a number of years i.e. to determine if the project is a sound investment decision. Main issue is the need to adjust for the time value of money (i.e. discounting) since costs/benefits occur over a number of years.
Problems with CBA:
- Costs and benefits associated with intangibles (things which have value but are difficult to translate into monetary terms) and externalities (costs and benefits accruing to others not directly involved in project) difficult to measure
- Assumes societal preferences are known, and what is accepted today will be acceptable in future years
- Data may be lacking e.g. livestock numbers, disease morbidity, economic impact of disease
- Difficult to predict future market prices
- Confusion stems from the fact that the highest BCR is to the left of the production function curve (high output per input), although the economic optimum is when ouput=input (maximum limit of input before there is reduced rate of return for every dollar spent).
Three decision making criteria are commonly used for CBA:
- Net present value (NPR)
- Internal rate of return (IRR)
- Benefit-cost ratio (BCR)
Discounting
Xt/(1+r)t
where Xt is amount of money at time t, r is the discount rate (e.g. 5% = 0.05), t is the number of years from the present
Process of converting future values into present values. Necessary when benefits and costs occur over a number of years. $100 received now is worth more than $100 received 1 year from now since the former can be invested at interest to accumulate more than its original value (~compound interest, X * (1+r)). Conversely, if $100 is received 1 year from now, the present value would be less than $100 (essentially back calculculate to present value though discounting).
Net present value (NPV)
Σ Benefitst/(1+r)t - Σ Costst/(1+r)t
Difference between the sum of present values of the benefits minus the sum of the present values of the costs.
Investment is worthwhile if NPV is positive (benefits outweigh costs).
Internal rate of return (IRR)
Σ Benefitst/(1+r)t - Σ Costst/(1+r)t = 0
Discount rate (r) that will make the Net Present Value (NPV) equal zero, i.e. break even. It is a threshold value - if the discount rate is above the IRR then the investment is worthwhile; if it is below the IRR then it is not worthwhile.
Benefit-cost ratio (BCR)
Σ Benefitst/(1+r)t ÷ Σ Costst/(1+r)t
Sum of present value of benefits divided by sum of present value of costs.
Investment is worthwhile if >1
Cost-effectiveness analysis
Cost-effectiveness analysis compares costs (dollars) and benefits (non-monetary units) of two or more courses of action [in contrast to cost-benefit analysis which compares costs (dollars) and benefits (dollars)].
CEA is typically expressed as a ratio where the denominator is a gain in health (QALY, DALY averted etc). It is often used in health services research where it may be inappropriate to put a monetary amount on a health effect.
