Download - 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
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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
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510
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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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