Policy Evaluation Model
The Policy Evaluation Model (PEM) is designed to use policy information from the PSE database to
determine the effects of policies and policy categories on economic outcomes such as production,
trade and welfare. It is a partial equilibrium simulation model of the agricultural sector in six OECD
regions and covers major crops (rice, wheat, grains, oilseeds) and livestock (milk and beef)
products. The PEM applies standard economic assumptions to model output and factor markets and
the interactions between them. Policy simulations typically take the form of a change in a policy,
represented as a “wedge” between the supply and demand price of a commodity or factor of
production. Adjustment to a new equilibrium after this change takes place by equating supply and
demand in all markets and is determined by the elasticities of demand for commodities, elasticity of
supply of factors and the elasticities of substitution between factors. Changes in welfare are
measured by changes in the producer and consumer surplus in each market, and allocated to the
relevant consumer or factor owner.
In addition to changes in the level of support as measured by the PSE, the model can also change
other policies such as the import TRQ levels for rice and the amount of land affected by the
production adjustment programme. More details about the implementation of the PEM for this study
can be found in Annex 1. For more information on the PEM model, the document “The Six
Commodity PEM model: Preliminary Results” contains a detailed description.