Econmics Modeling

7/27/2019 Econmics Modeling

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Basic Components of Talk

The economic problem

Some theoretical deductions - hypotheses

Conceptual modeling

A simplistic first cut

Broader project efforts


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The Economic Problem Anticipation, prevention, detection, response andrecovery all take money, much of which is spent in theabsence of an event. So how do we

Form best investment strategies considering cost,disease vulnerability, risk, and event characteristics?Best respond to an event?

Assess effects on markets?Manage market information to minimize impacts?

AnticipationPreventionInstallationScreening

DetectionResponseRecovery

Ex-Ante Invest Ex-Post Fix


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H0: Tilting Factors

Tilt toward ex-ante

Event is more likelyEx-ante Activity has multi benefitsEx-ante Activity is more effectiveEx-ante Activity is cheaper Ex-post treatment more costlyFast spreading diseaseMore valuable targetBig demand shift -- health

DetectionResponseRecovery

Ex-Ante Invest Ex-Post Fix AnticipationPreventionInstallationScreening

Tilt toward ex-post

Event is less likelyEx-ante Activity is single purposeEx-ante Activity is less effectiveEx-ante Activity is expensiveEx-post treatment less costlySlow spreading diseaseLess valuable targetLittle demand shift -- health


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No, has many well known variantsFood Quality/Safety from contaminantsInvasive speciesVeterinary disease control

Water management and impoundment constructionFarmer machinery investment, crop mixInventory theory, quality control, waiting line designCapital budgeting

But with added features of deliberate actions at maxpoints of vulnerability. Not an accident. All involve ex ante decisions but the ex postconsequences occur only when event occurs -probabilistic

Background:Is the Problem a New One?


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Project Goals Examine the optimal economic allocation of portfolioof anticipation, prevention, detection, response andrecovery actions

Look at event characteristics (disease spread andeconomic damage consequences) under which

strategies dominate

Evaluate anticipation, prevention, detection,response and recovery strategy alternatives in avalue of research or technology adoption context

Look at market effects and recovery enhancementstrategies

Educate on economic principles


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No EventInvest in:

PreventionDetection

Responsecapability

STAGE 1Pre Event

Normal: No Event

EventRespondPreventDetectRecover

No EventRecover

EventRespondRecover

STAGE 2PossibleEvent

STAGE 3 National and LocalManagementDecisions

Analytic Conceptualization:Three Stages

*2P1

1-p

p*2 P


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Analytic ConceptualizationMajor elements

Irreversibility cannot instantly installinvestments when an event occursConditional response depending on investmentsFixed cost versus infrequent occurring eventsIncome depends on event and there is a largespan of possible eventsTradeoff between ex ante investment cost and

occasional ex post event needs and associatedcostsBest strategy depends on investment cost,operating cost and probability


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Analytic Conceptualization

Expenditure on Ex-Ante

C o s

t E n c o u n

t e r e

d

Ex-Post CostEx-Ante Cost

Total Cost


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Simple Example of model

Problem will have 2 stages

Stage 1 Investment stage when we choose whetherto construct facility for which we define asingle variable Y

Stage 2 Operation stage when we use facility andknow prices, and yield which results invariable to operate with (I) or without (NI)

the investment under each state of nature(the 4 variables X)


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FMD mitigation options

Vaccination (Schoenbaum and Disney 2003,Carpenter and/or Bates, Ferguson2001,Berentsen 1992, etc.)Slaughter (Schoenbaum and Disney 2003,Carpenter and/or Bates, Ferguson2001,Berentsen 1992, etc.)Movement Ban (Ferguson 2001)Surveillance and Detection (McCauley et al.1979)Monitoring imports (McCauley et al. 1979)Monitoring travelTracing

Recovery/information (Ryan et al. 1987)


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Formation of Animal DiseaseManagement System

Prevention -- systems where there are actionsundertaken to try to avoid disease introduction

Detection -- systems designed to screen animals todetect disease early to allow more rapidtreatment and much lower spread than wouldotherwise be the case

Response systems which involve actions to stopthe spread and ultimately eradicate the disease

and to avoid further economic losses.Recovery -- systems put in place to restore lostassets or demand shifts due to introduction of animal disease


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P Probability of outbreakL(N,R) - losses associated with prevention, response and occurrence

of potential FMD outbreak.N - number of tests performed annually on cattle in the region.

R - response activities in the state of nature where outbreak occurs.Y - binary variable representing investment in surveillance system.CR - costs of response activitiesFTC - fixed testing costsVTC - variable testing costs.

H(R) response effectiveness function. proportion of animals lost incase of an outbreak under various levels of response actionsD(t) - is the disease spread function expressed in terms of days that

the disease is allowed to spread before detection.V Value of losses per infected herd

t Maximum number of days disease is undetected, 365/(N+1)

RCRt D R H V P VTC N FTC Y R N L )()(,


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AssumptionsCost minimization of ex-ante costs plus probabilistic

weighted cost of response.Response effectiveness

Slaughter (Schoenbaum and Disney, 2003)Convexity

Disease spreadExponential (Anderson and May, 1991)andReed-Frost (Carpenter et al. 2004)Fast (0.4) and slow (0.15) contact rates(Schoenbaum and Disney, 2003)

Source: Elbakidze, Levan, Agricultural Bio-Security as an Economic Problem: An Investigation for the Case of Foot and Mouth Disease,In process PhD Thesis, Department of Agricultural Economics,

Texas A&M University, 2004.


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Model ExperimentationEvent levels: Probability 0.001 0.9Severity or spread rate: slow vs. fastResponse effectiveness: 17% - 30%Variable costs of detection 0.1TVC, 0.01VTC

Average herd size: 50 to 400. Ancillary benefits: FTC-$50 per herdRecovery actions: decrease loss of GI per animal by 30%


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Event probability, Response effectiveness, VTC costs

i

ii

iii

iv

v

vi

05

10152025

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0 0.2 0.4 0.6 0.8 1 P

N i ii iii iv v vi

RFi Full variable Costs (VC),

Response Effectiveness

(RE)=0.17ii VC, RE =0.3iii 0.1VC, RE=0.17iv 0.1VC, RE=0.3v 0.01VC, RE=0.17

vi 0.01VC, RE=0.3

Results


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Spread Rate

v

vi

i ii

iii

iv

vi

012

34567

0 0.2 0.4 0.6 0.8 1P

N i ii iii iv v vi

i

ii

iii

iv

v

vi

0

510

1520

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0 0.2 0.4 0.6 0.8 1 P

Ni ii iii iv v vi

Slow RF Fast RF

i Full variable Costs (VC), Response Effectiveness (RE)=0.17ii VC, RE =0.3iii 0.1VC, RE=0.17iv 0.1VC, RE=0.3v 0.01VC, RE=0.17

vi 0.01VC, RE=0.3


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Herd SizeIncreasing herd size from 50 to 400

increase # of tests. Reached 39 for fast spread.

Ancillary benefits

Decrease FTC by $50 per herdNo change in # of testsLower the probability of adoption in slow spreads

Recovery actions

Decrease in losses of GI per animal by 30%Did not have a noticeable effect on surveillance intensity.


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Hypotheses / DeductionsThe best investment/management strategy

For slow spreading attacks addressed at low-valued targetswith low consumer sensitivity would focus investment moreon response and recovery.

For rapid spreading attacks addressed at high valuedtargets with high consumer sensitivity items would focusmore on prevention, rapid detection and rapid response (for example hoof and mouth).

Would favor alternatives with value both under terrorismevents and normal operations as opposed to single eventoriented strategies (for example a comprehensive testingstrategy that would also catch routine animal diseases).


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ConclusionsInvestigated relationship between detection(prevention) and slaughter (response) strategy.

effort in a priori surveillance increases with threat level,

cost reductions in surveillance, with disease spread rate,lower degree of effectiveness in response, and averageherd size

Estimates of lower bounds of losses due to FMDoutbreak. Trade, consumer scare, other industriesnot considered.


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Conclusions

Caution: functional forms, parameters, costestimates.

Future:Explicitly include vaccination, recovery,Disaggregate to localized strategies

Cooperation/non-cooperation

Include Risk AversionLink to epidemiology model


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Future Work: Items of Economic ConcernAnimal categories

UnaffectedEuthanizedDead from diseaseImpaired by diseaseVaccinated

Affected animal disposalMarket value and useCarcass disposal

Investment studyStrategy costingRisk distributionFixed vs event specific costs

MarketsInformation management and demandDynamic responseDemand suppression

Policy designCooperation

Ex ante -- ex post balance


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Data from Epidemiology

N(r)(s,k,i,j,h)s State of naturek - region

i - vaccinated, dead, infected, preventatively slaughtered,unaffected,j - stage along supply chain: cow/calf, stocker, feed yard.h - mitigation strategyt - daysr random trial


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Mitigation Strategy

h1 h2 h3 hnS1 K1 Feedlots Vaccinated N N N N N

Slaughtered N N N N NUnaffected N N N N N

Dead N N N N N

Stockers

Cow/calf

K2

R e g i o n

F a r m

O

p e r a t i o n

A n i m a l

H e a l t h

T y p e o f

o u t b r e a k

* N is either a probability distribution across randomizedtrials, or there needs to be a table of the above form for

each random trial.


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Modeling Conceptualization

Big elementsMulti disciplinary study

Domain experts, Veterinarians, Epidemiologists,

Information technologists, Economists Ties together a number of models

Designed for insights not numbers

Will run backwards to see what characteristicsof diseases and event probabilities merit whattypes of strategies


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Contemplated Studies Vulnerability / risk assessmentEffects of events without new strategiesCost of waiting in detection

Attack scope and costs thereof Component strategy evaluations

AnticipationPreventionDetection

ResponseRecovery

Investment / strategy mix studyStrategy useEffects of disease characteristics

Event probability that mandates actionsEvent specific vs multi outcome strategy valueRisk / investment assessment

Other Recovery information managementCarcass disposalPolicy design and cooperative behavior


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Econmics Modeling

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