The economic optimization model is a single-year mathematical programming model of constrained optimization which represents farmers' behaviour and predicts their response to policy and environmental changes. This model is based on the economic theory-based assumption that farmers maximize their utility subject to economic, technical and policy constraints. The model considers utility losses due to the risk faced by farmers as a response to climate and market variability. It is based on previous work conducted by UPM team (see Blanco, 2010; Esteve, 2009; Varela-Ortega et al., 1998; Varela-Ortega et al., 2006; Varela-Ortega and Blanco, 2008; Varela-Ortega et al., 2008; ) adding the potential simulation of climate change adaptation strategies that farmers will follow in addition to other policy and climate scenarios. The model is written in GAMS and it is calibrated using the risk aversion coefficient according to ranges established by Hazell and Norton (1986).
The objective function is defined as follows:
Where: Z: farm income; ?: farmer's risk aversion coefficient; ?: standard deviation of farm income; GM: gross margin; Xc,k,r: vector of the activities; c: crop; k: soil type; r: irrigation method; SUBSc,r: CAP subsidies; IRRC: irrigation costs; LABC: labour costs.
This maximization is subject to land, labour, water and policy constraints:
This model allows simulating different stakeholder-driven and policy-driven scenarios, to assess their impacts on the environment, on farmers' income, on public expenditure and on land use at farm and at regional level.
The model has been developed, calibrated and validated for the Upper and Medium Guadiana sub-basins in the context of the NeWater and the SCENES projects (Blanco-Gutiérrez et al, 2011; Blanco-Gutiérrez et al., in press; Carmona, 2011; Carmona et al., 2011; Varela-Ortega et al 2011).
This toolbox entry has been labelled with the following tags:
| Sector: | Agriculture | |
| Spatial scale: | sub-national; local | |
| Temporal focus: | future | |
| Onset: | slow | |
| Role in decision process: | diagnostic | |
| Level of skills required: | modest | |
| Data requirements: | limited | |
| Adaptation tasks: | Potential impact projection; Residual impact projection |
Key Strengths:
The economic model allows for assessing impacts of climate change and to simulate different policy measures for adaptation, its economic impacts at farm and regional level, its impact on resources consumption and its cost-effectiveness.
Geographic applicability of the tool is limited to local (farm level) and sub-national scales.
The results of the economic model can be used for cost-effectiveness analysis of policy alternatives, as well as economic vulnerability assessment, when combined with social and environmental factors.
While no specific documentation exists for this tool; documentation can be found via projects for which the model has been used. To successfully implement the economic model, knowledge of constrained optimisation and mathematical programming is required; beyond this knowledge of economics and optimisation, experience with using the GAMS suite is recommended, along with a computer system able to run GAMS software.
The economic model has been used within the MEDIATION project as a tool to assess the impacts of climate change (i.e. reduced water availability for irrigation, changes in crop yields, etc.) and to evaluate different policy options and their impacts on farm income, land use (cropping patterns) and water consumption in irrigation.
Blanco, I., (2010). Economic-hydrologic analysis of water management strategies for balancing water for nature and water for food. Implications for the Guadiana River Basin, in Spain. PhD Thesis. Universidad Politécnica de Madrid, Madrid.
Blanco-Gutiérrez, I., Varela-Ortega, C., Flichman, G., 2011. Cost-effectiveness of water conservation measures: A multi-level analysis with policy implications. Agricultural Water Management 98, 639-652.
Blanco-Gutiérrez, I., Varela-Ortega, C., Purkey, D., (in press). Integrated assessment of policy interventions for promoting sustainable irrigation in semi-arid environments: a hydro-economic modeling approach. Journal of Environmental Management.
Carmona, C.; Varela-Ortega, C. y Bromley, J. 2011. The use of participatory object-oriented Bayesian networks and agro-economic models for groundwater management in Spain. Water Resources Management 25(5). DOI: 10.1007/s11269-010-9757-y
Carmona, G., (2011). Development of a Participatory DSS for the Impact Assessment of Future Scenarios and Water Management Options. Application to the Guadiana Basin, In Spain. PhD Thesis. Universidad Politécnica de Madrid, Madrid.
Esteve, P. (2009). Analisis de la vulnerabilidad socio-economica a la aplicacion de politicas de conservacion de los recursos hidricos en la cuenca media del Guadiana'. Master thesis. Universidad Politecnica de Madrid.
Hazell, P., and Norton, R.D. 1986. Risk in the farm model. p.76-110. In Mathematical programming for economic analysis in agriculture. Macmillan, London, U.K.
Varela-Ortega, C., Blanco, I., 2008. Adaptive capacity and stakeholders' participation facing water policies and agricultural policies. Paper resented at the XII Congress of the European Association of Agricultural Economist (EAAE) on People, Food and Environments: Global Trends and European Strategies, Ghent, Belgium, August 2008.
Varela-Ortega, C., Blanco, I., and Carmona. G., 2006. Agro-economic model for analyzing policy scenarios and cost-effectiveness of policy measures, linking water and agricultural policy. Development of a prototype model. Deliverable D 1.7.5.b (I). Main report. NeWater project, 6th Framework Program of the European Union, Contract nº. 511179. UPM, Madrid, Spain, 45p.
Varela-Ortega, C., Blanco-Gutiérrez, I., Swartz, C. H., & Downing, T. E., 2011. Balancing groundwater conservation and rural livelihoods under water and climate uncertainties: An integrated hydro-economic modeling framework. Global Environmental Change, 21(2), 604-619.
Varela-Ortega, C., Esteve, P., Blanco, I., Carmona, G., Herández-Mora, N., 2008. First drafts of storylines and conceptual models at the Regional and Pilot Area levels. Unpublished report (DIA2.2). SCENES project.
Varela-Ortega, C., Sumpsi, J.M., Garrido, A., Blanco, M., Iglesias, E., 1998. Water pricing policies, public decision making and farmers' response: Implications for water policy. Agricultural Economics 19, 193-202.
