HOW SUBSIDIES ARE USED AS EMISSIONS REDUCTION STRATEGIES

Economic and environmental goals can be co-operatively implemented to achieve a less polluted environment. Those policies and ideas advocating otherwise for instance, the opponents of the Kyoto protocol that was signed in Kyoto, Japan who claim that energy conservation would harm the economy should be reviewed. The two however compliment each other since some emission reduction strategies also support economic development.

Studies done in the US have prompted some to conclude that the benefits of subsidies remain elusive. However there are strong reasons to include these multibeneficiary programs in the efforts to reduce GHG emissions. Efforts should be channeled to developing Innovative ways such as the application of subsidy justification assessment to reduce uncertainty. Subsidies are a powerful incentive that does not contradict the economic objectives of corporations and can thus form the moral fiber of such strategies aimed at reducing emissions. The question is therefore not whether subsidies should be used as a strategy to reduce emissions but rather how they are used and how the use of these strategies can be used more effectively.
These subsidies are implemented in different governments for different reasons. For instance, a countrys could enhance international competitiveness by keeping the business costs down. Since energy is used in every aspect of modern life, higher energy prices should increase not only the direct cost of the energy used by companies but also most of other expenses as well.

Before commencing on to the possible strategies that can be adopted, it is of great importance to understand the cause of all these environmental catastrophes and the effect that they have on the environment and on human beings. Global warming and climate change have dominated the world debate over the past few decades. This is because the world temperatures have been rising at an alarming rate. The rise in temperatures can be attributed to the increase in the emissions of greenhouse gasses such carbon dioxide, methane, ozone and nitrous oxide. These gasses trap heat on the earths surface and cause what is referred to as the greenhouse effect characterized by uncontrolled rise in temperature on the earths surface. The effects of such climate changes include rise in sea levels, abnormal melting of glaciers, expansion of subtropical deserts, extinction of some animal and plant species as well changes in agricultural yields. Other environmental problems are caused mainly by pollution arising from human activities such as fossil dumping and chemical wastes dumping into rivers and other water bodies. Most of these activities have been seen to have direct impacts on both human beings and the environment. In order to avert such impacts, the following alternative measures should be taken.

Revenue tax policy
First and foremost, the environmental departments and all the other stakeholders need to come up with a revenue-neutral tax-subsidy policy for carbon emission reduction. In this policy, the environmental departments can decide to develop alternative fuel sources to reduce dependency on fossil fuels and thus mitigate emission of greenhouse gases arising from consumption of this fuel. This is because approximately 75 of carbon dioxide emissions are as a result of combustion of fossil fuels. Bio-fuels have therefore been touted to be viable alternative to the fossil fuels with the main purpose of lowering carbon emissions from combustion engines. Examples of bio-fuels include corn ethanol which emits almost 22 less greenhouse gas than gasoline. Given similar energy that is equivalent from a coal power plant that usually produces approximately 5 of the net emissions while taking into account the carbon sequestration potential of trees during growth, there is a considerable amount of carbon reduced. (School of economic studies) In addition to that, there can be an introduction of carbon tax as means of addressing the externalities that are associated with carbon dioxide emissions that arise from fuel production and use. In order to promote the use of alternative fuels, the Federal Government and other governments can introduce bio-fuel. This entails increasing the level of consumption of renewable fuels ranging from 9 billions gallons that was consumed in 2002 to around 36 billion gallon that was consumed in 2008. By 2008 consumption standard, it is estimated that there was a 7.76 renewable fuel content of motor fuels.

This will lead to roughly 24 ethanol content in gasoline by 2002. Furthermore, the Energy Security and Independence Act in America impose a requirement that an increasing fraction of renewable fuels be comprised of advance bio-fuels based on biomass and alternative types this only goes further to improve the situation.  Bio-fuel has been used as a subsidy because of two main reasons. One of them is the changing relative price of motor fuels in favor of renewable fuels which have a lower carbon emission. The second reason is that it reduces the dependency on fossil fuels through technological innovations. The subsidies that can help in technological innovation in the production of bio-fuels and mitigation of greenhouse gases can be applied at both the state and federal level. They help in decreasing renewable fuel production costs while improving the economic viability of bio-fuels in the long run.

Subsidies are ranked high among the instruments that are frequently used in environmental policy making. They are simply the most efficient instrument to achieve both short term and long term environmental objectives.

Another subsidy that can be used to mitigate carbon emissions is through introduction of abetment technologies in factories and industries. The carbon abatement technologies are group of innovative technological advancements that enable the large industrial plants to operate with substantially reduced carbon dioxide emissions. These technologies have the capacity to reduce carbon emissions up to 90 and still retain a significant amount of export potential. It involves the efficiency of conversion processes to reduce the amount of fuel consumed and associated carbon dioxide emissions.

An example of an abetment technology is the developments of boiler technologies for efficient coal combustion and advanced steam and gas turbine technologies that accommodate higher temperatures. These technologies will help to capture carbon dioxide, both pre and post combustion and oxy-fuel firing to improve their efficiency and thus reduce capital running costs. This is important since technological change is considered the primary solution to the environmental problems in the long-run. It has also been recognized that environmental policies create incentives that affects the whole process of technological development.        

Emission standards
Emission standards are vital in the current environmental situation. They put in place specific requirements requiring all concerned especially the industrial polluters to limit the amount of pollutants they release in to the atmosphere up to a given maximum level. Automobile emissions are also checked this is evident in the continued improvements being done on motor vehicles. Most of them nowadays are low emitters.
Such regulations if strictly followed can lead to attainment of an environment where the least possible pollutants are emitted .Emission licenses can only improve the situation all the more. Emission licenses can be used to ensure that more and more efficient motor cars and industries continuously replace the less efficient and thus more polluting ones. This can be achieved by making it a requirement that the level of efficiency be reviewed annually upon which a license would be issued .This will completely phase out those that are not compliant.

Transferable discharge permits
Closely related to emission standards are transferable discharge permits. They revolve around Marginal Abatement Cost (MAC) set by governments .They can be applied to reduce pollution by issuing licenses on the maximum possible amount that a given operator for example a given industry can be allowed to emit during a given period. This goes along way in ensuring the relative amount of pollutants that will or should be emitted during a given period.

Abatement Policy
In order to implement abatement policies, the government can impose two types of fiscal measures the pollution tax and lump-sum subsidy. The regulator which in this case is the government can either construct a menu or subsidy combinations to induce firms to self select. On the other hand the regulator can impose a uniform policy on all the registered firms within the industry commonly called a pooling policy. While doing this, the policy regulator can also construct a set of subsidy combinations that induce all firms to self-select the direction they want to take.

The key determinants of the policy that can be adopted include the marginal abatement costs of the technologies. This simply means that the lower the marginal abatement costs the more pollution that is abated which in turn means the smaller is the pollution tax base. A smaller tax base means an increase in the pollution tax rate that the firms are willing to accept for an extra dollar of the subsidies. This creates more efficient firms which tend to prefer higher tax combination.

Emission fees
Environmental conservation meets Economics in Pigouvian taxes.   Pigouvian taxes are fees charged on a given output of pollutants into the environment. It is basically an additional charge for additional emission of pollutants in to the environment over and above the set maximum limit. These are geared towards reducing significantly the amount of pollution while at the same time achieving effectiveness and efficiency in production and operation of other emitters like motor vehicles.

Pigouvian taxes comes not without challenges though, they can only be applied successfully if and only if proper mechanisms are put in place to measure the amount of pollutants released into the environment. This is because, unlike other commodities on which taxes are levied, pollutants are not taken to the market. As a matter of fact some will be tempted to dump pollutants at odd places and at odd hours to evade paying the Pigouvian tax.

Firms with higher Marginal Abatement Cost are allowed to sell to those with lower Marginal Abatement Cost if they are sure that they cannot exhaust their share. This encourages firms across the economy to improve on their efficiency and in turn reduce the amount of pollution to the environment. This is a very good method of controlling pollution since the charges associated with going against these regulations are enormous. Therefore the governments have almost absolute control over the whole issue of pollution, economically speaking.

Voluntary environmental programs
Voluntary environmental programs comprised of firms operating in the same industry are another method which can help greatly in reduction of pollutants emission and their accompanying effects. A perfect example to point at is that of US Chemical manufacturers Association which have designed its own regulations which must be religiously followed by member firms in an effort to reduce to the greatest extent possible the amount of pollution associated with that industry.

This is advantageous not only for the primary reason of environmental conversation but also to marketing strategies of those firms. As more and more firms go global, they would like to be seen as sustainable and would thus employ this as a promotional gimmick through corporate social responsibility. The firms also argue that the more they fight pollution, the more they become efficient since they associate more pollution with increased inefficiency. 

Reducing emissions is a matter of international importance and should be given the urgent attention it deserves. Any time lost in indecision by the world governments and policy makers is too costly. The policy makers and the firms need to give priority to efforts aimed at conserving the environment. They need to among other things adopt the measures above to ensure that they run cost effective firms and at the same time ensure that the environment remain free from carbon emissions and other pollutants.
As the business environment gains momentum towards globalization, the government and other stakeholders should be more innovative to come up and implement new policies, economic or otherwise to counter the dynamic environmental conservation challenges. These policies should be such that just like most of those discussed above they serve two or more purposes at the same time conserving the environment and achieving increased efficiency in the operations of these stakeholders.

Most importantly ethical operations of all concerned can influence to a great extent how these policies, economic or otherwise achieve the desired results. These should therefore be emphasized at all times even as charges, taxes and penalties are imposed.

Macroeconomics Simulation

1. The simulation showed many varying fiscal policy instruments. The ability to control government spending was illustrated by the form for adjusting government expenditures on infrastructure and education. The simulation also allowed for the manipulation of tax policy by varying the income tax rate. These three factors  infrastructure expenditures, education expenditures and tax rate were but a condensed and simplified toolset for emulating all the possible fiscal policy decisions that a real government might partake in actual macroeconomic planning scenarios.

Apart from these variables, the simulation also showed several analogues of real world economic data. The simulation showed a simplified overview of the fictional countrys budget, concentrating on the amount of deficit present in the annual budget. Apart from the budget, the inflation rate, unemployment rate and popularity was also tracked by the simulation. These dependent factors would vary according to the decisions made in adjusting the expenditures and income tax in the simulation. Increases in expenditures tended to increase the budget deficit and the inflation rate. On the other hand, increases in expenditure reduced unemployment and increased popularity. Raising income tax increased unemployment and reduced popularity but curtailed inflation the rate as well as helped balance the budget by increasing the cash inflows.

2. An increase in expenditure was reflected on the aggregate demand and supply plot as a rightward shift of the aggregate demand curve. Additionally, the increase in expenditure was also reflected as an increase in GDP. This GDP increase was derived from the multiplier for the expenditure. For the fictional country of Erewhon, the marginal propensity to consume (mpc) is 0.8 which gives a GDP multiplier of 5. This means that an increase of X million in expenditures would correspond to a 5X million increase in GDP.

The GDP increase is seen in the rightward shift of the aggregate demand curve as it intercepts the aggregate supply curve further along the x axis. However, increasing expenditures above a certain point will start to trigger an increase in inflation. This is because when it starts intercepting the aggregate supply curve in its upward sloping path, rightward shifts of the aggregate demand will also produce increasing intercepts along the Price Level axis.

Adjusting the tax rate also has the same effect. Decreasing the income tax also corresponds to rightward shifts of the aggregate demand while increases move the aggregate demand to the left. However, the shifts in aggregate demand are not as pronounced as compared to the shifts produced by expenditures. The effects of income tax are also dictated by the effects of the moving intercept between the aggregate demand and aggregate supply curves.

3. One key point was the difference in the multiplier between income tax and government spending. This fact was clearly demonstrated in the simulation. A 100 million cost towards expenditures would produce a greater shift in demand and a greater increase in GDP as compared to spending the same 100 million in a tax cut effected by reducing the income tax rate. Increasing expenditures by 100 million led to a 500 million increase in GDP. Reducing the government income by the same account through a tax reduction only increased GDP by 400 million.

The simulation also stressed how increases or decreases in expenditures translate to rightward or leftward shifts of the aggregate demand curve. The simulation graphically showed how policy decisions affect the countrys aggregate demand and supply curve. Increases in expenditure shift the demand curve rightward while decreases in expenditure shift the aggregate demand curve to the left.

Another key point emphasized was the relationship between aggregate demand, supply and inflation. The plot clearly demonstrated how shifts in aggregate demand translate to higher GDP and a higher price index.
Another interesting point from the readings which was shown in the simulation was the three-stage shape of the aggregate supply curve which produces a rounded backwards L shape. This reverse rounded L shape is formed by a horizontally flat initial phase, followed by a positively sloped middle phase and ends with a vertically sloped segment. This L shape can be traced back to the law of diminishing returns. At the initial phase, marginal returns are high as the economy has lots of spare  production capacity. As such, production can increase without needing price increases. When the production capacity is saturated, the market needs higher and higher prices in order to justify increased production. This makes the path of the aggregate supply curve go asymptotic upwards.

4. One important take away lesson is to be found in the aggregate supply. The workplace can be seen as a miniaturized version of the national economy. The reversed L supply curve tells us that production capacity should be pushed to the limit before inflation can take place. In the workplace, this tells me that keeping the price level constant, the company should produce at its highest possible efficiency until it hits production bottlenecks. In the national economy this situation provides for greatest GDP without inflation. In the workplace, this translates to utilizing all the companys resources for production effectively without resulting in having to charge higher prices for our products.

Another take away lesson from this simulation is a better understanding of current events. This may not translate directly to the workplace as it is quite frankly more useful to me as a person not me as an employee. Fiscal policy is an important issue in governance and it is often the subject of much public discourse. Economists, ideologues, politicians and spin doctors all have their own say on many various politically charged economic issues. By having an understanding of the effects of government fiscal instruments, I as a person would be better prepared in understanding the options available to the government. This can lead to better democratic decision making on my part.

5. For me, the interaction between unemployment and inflation was quite interesting. The simulation clearly showed the dichotomy faced by government as they can only choose to reduce one of the two factors. Efforts to reduce unemployment will tend to increase inflation. On the other hand, efforts to curb inflation tend to increase unemployment levels. This brings to mind the concept of an equilibrium point by which the government shall have to balance an acceptable inflation rate with an acceptable unemployment rate.

Additionally, this exercise also brought out some similarities and differences with microeconomic analysis. One major similarity between the exercise and microeconomics is the usage of the same supply and demand framework. In microeconomics, the framework is used to figure out equilibrium prices and quantities  for the exercise the same framework was used to figure out the analogous quantities of price level and GDP. One major difference though was the presence of a multiplier effect. Macroeconomic policy changes have more sweeping effects than microeconomic policy changes not only due to the scope of the problem but also because of the multiplier effect inherent in mapping out an entire economy. 

Global Business Opportunities

In various agricultural trials, sorghum has proved to be a viable alternative to barley primarily due to the rising cost of producing barley and the high international prices. While the beer industry is one of the major consumers of barley worldwide, the bio fuel industry is competing for the available crop for use in producing fuel ethanol. With global production levels of barley relatively steady, a rise in demand is likely to push prices up even further. This will squeeze profit margins for major users of barley and force up prices of finished goods. Beer consumption is likely to fall as beer companies pass on higher costs to the consumer.
The food industry is turning to sorghum to provide solutions for people diagnosed as being gluten intolerant.  Sorghum is gluten free and hybrid species have produced flour that makes quality bread and cakes. The potential for this product to replace wheat is enormous and the low cost of production will translate into lower consumer prices.

Sorghum is a crop native to Africa and does well in tropical regions. Most communities grew the crop as a staple food. With the introduction of maize, outputs declined as more farmers adopted maize as their main food crop. Changing weather patterns have encouraged African governments to reintroduce the crop because of its drought resistant qualities.  Scientists have also developed improved varieties that are pest resistant, high yielding and possess improved malting qualities. The stalks are an important source of molasses and have great potential for the bio fuel industry. Costs of production in the US average 110 per acre, which compares favorably with 140 per acre for barley. In Africa, this cost falls to as little as 45 per acre.

With most developing countries striving to attain the millennium development goals of food security, poverty eradication, and better lifestyles for all, the introduction of sorghum as a major cash crop is a great boon to African farmers especially in the tropical regions. East and central Africa are high potential areas for growing this crop as the ideal weather conditions include average rainfall and plenty of sunshine. Since population densities in these areas are low, the potential for large-scale farming is very high. Applying modern technology to traditional farming practices can greatly improve outputs and lead to a doubling of the current world production of approximately 60 million tons.  

Rising costs of fuel are eroding gains most nations are making through renewed economic growth policies. Sorghum molasses can alleviate this situation and provide cheaper sources of power for sorghum producing countries hard hit by inflation and high electricity costs. Lower production costs arising from cheaper fuels will improve the price competitiveness of exports and lead to increased foreign trade.  Based on these factors, the global business opportunity that exists is for an investor to negotiate with African governments to support a massive sorghum production program with the aim of increasing outputs for the crop. In Nigeria, sorghum has replaced barley as the main ingredient for malting purposes. Replicating this scenario throughout Africa and the rest of the world is possible provided sorghum production meets the market demands.
The business model will take the form of agricultural production and marketing firm. Contracted farmers will grow the crop under controlled conditions with the promise of guaranteed minimum returns. The company will invest in regional buying and processing centres and provide adequate transport facilities to ensure timely delivery of harvested crop. Bonus payments to efficient farmers will encourage better crop management and provide the incentive to produce more. By building molasses plants and producing ethanol from sorghum off cuts, the company will increase its income streams. This will enable the company to reduce its operating costs, as it will have a cheap source of power to run its factories.

The main markets for the crop will include the global brewing industry and major food factories dependant on wheat as their key ingredient. Lower input prices will attract these market players to adopt sorghum as an alternative to barley or wheat. With an assured market, the company can develop its network of out growers and expand the area under cultivation by venturing into Southern Africa. 

Tropical Africa is the most appropriate location to establish this business venture primarily because the crop is indigenous to the region. The climatic conditions are ideal for high production while the land is cheap and readily available. Low population densities mean that introducing large-scale farming is viable without additional costs of relocating families. Labor costs are low and high employment in rural areas will ensure a steady supply of workers to till the land and harvest the crop. East and central Africa have a number of port gateways that will ensure efficient export of the crop to international destinations.  

Internet penetration and mobile phone densities are still very low in Africa. This contrasts greatly with the situation in Europe and Asia. As part of the millennium development goals, the global community has committed itself to ensuring every person has access to some form of communication.  Nokia Company has a good business opportunity of increasing its market share by introducing low cost phones with internet capabilities to rural Africa. With an estimated population of about 1 billion, only 63 million people are connected to the internet or have reliable telecommunication services. Africas use growth figures for the period 2000-2009 are 1,394, which exceeds the rest of the world at 394. 

Through aggressive marketing and the development of user-friendly phones, Nokias sales will increase tremendously. A key marketing tool is the need to provide phones that have solar charging capabilities as most of rural Africa remains unconnected to national electricity grids.

Module 2 Analyzing International Competitors
Diageo Breweries Experiment with Sorghum
Diageo Breweries through its affiliates in Uganda, Tanzania, and Kenya is promoting sorghum cultivation to supplement their malting needs. In Uganda,   Nile Breweries have switched from using barley to sorghum in the malting process. The current technology is limited to producing malt used in low-end beers as research continues for a solution to the entire brewing process. Their efforts are geared to meeting their local demands with future prospects of satisfying the needs of the foreign branches. The company is working through third parties to avoid increasing its overheads by establishing an agricultural unit. With the focus mainly on producing malt, the companys immediate goals do not include ethanol production or sorghum for the food industry.

Ethanol production in Africa is low and its use is not as widespread as in the developed world. Energem Resources Inc. currently produces ethanol in Kenya and relies on the supply of sugarcane molasses as its raw material. The supply of molasses has become erratic due to the poor state of the sugar industry and the company is unable to meet local demands. This has forced the country to import ethanol from other countries to meet demands. By processing sorghum molasses into ethanol, an investor will reap good profits exporting the fuel to those countries that require more quantities than they can produce.  The business opportunity of satisfying the needs of food industries in developed nations will ensure that loss of demand from the brewing industry does not lead to a loss of market for the crop. Increased demand for the crop by competing needs will translate into higher producer prices paid by the investor as opposed to those offered by the Diageo Company.  Higher prices will encourage more farmers to sign up with the investor and thus increase the acreage under plantation.

Efficient transportation facilities will ensure that the goods arrive at the market on time so producers can meet their production targets. Reliable markets with a growing demand encourage increased production and enable an investor to conduct research into developing products of a higher quality. Good quality products fetch better prices on the international market, increase the incomes of those along the production, and supply chain. 

With lower costs of production due to efficient mechanisms and economies of scale, profit margins will increase which will translate into better prices for the suppliers of raw materials. Increased income for the supplier will have a multiplier effect on the economy resulting in higher growth rates and increased consumer spending which will spur all sectors of the economy.

Locating a business where the cost of production is low will give a distinct advantage in the production of a commodity. Sorghum production in the US is possible but the high cost of labor and machinery compare poorly with alternative locations like Africa. Ideal production conditions improve the yields of agricultural products. Africa is blessed with sunny conditions throughout the year. This factor makes it possible to harvest crops at least three times per annum as opposed to those lands that experience winter seasons. Proximity to the markets is another consideration when establishing a business. Transport costs make up a significant percentage of the finished good and the closer the production is to the market the lower the final cost. East and Central Africa have port gateways on the Atlantic and Indian oceans that are served by international shipping lines.

Developed financial markets are important for international commerce. Modern business transactions are conducted using electronic money transfers and internet banking thus ensuring speedy exchange of money and delivery of goods. Unrestricted repatriation of profits and stable exchange rates are the hallmark of a stable economic system. This encourages foreign direct investment and assures investors that their investments are safe.

Political stability is very important for a good business environment. Smooth transfer of power and established political structures create confidence in the business community. Investment tends to be very high in those states where political stability is assured, as the costs of production remain, low as a result peace and security. 

Customer Inserts Grade Course

A house is one important structure that forms one of the basic human needs in life. A house is the basic component in making a home. From a home, families are able to bring up individuals who grow, develop and contribute in one way or another to society. I therefore say that an effective society as we know it is directly reliant on the houses that provide homes to families. Individuals can hardly function well if they didnt get a good nights sleep, were able to cook and eat their breakfast, hence the importance of having a house where the basic activities of daily living are accomplished. Due to dilapidation and a steadily increasing population, more houses are being required every year.

However, the price of houses determines what kind of home one will acquire. The prices of houses are estimated through mortgages that are paid. The current financial crisis in that began in the USA made investors in real estate change the prices of their houses downward has unemployment increased (Andrews and Calmes, 2008). This situation could not be resolved through foreclosure since neither the bank, nor the owner of the property, could sell it to recover losses, there were simply no buyers because they expected prices to go down further. This has negatively affected spending behavior McQueen (2008) asserts that spending has started to falter and quotes several factors, which have caused this fall in spending by UK consumers.

CHANGES IN PRICES OF HOUSE
The price of anything plays a major part of the market operations. The price is determined by the interaction of demand and supply in the market. On the other hand the movement of price, which we call price adjustment, always maintains equilibrium in the market. Any dispersion from equilibrium is automatically recovered by the price adjustment. At the existing price level the market will face the excess demand. Then the price starts its action. The excess demand would pull the price up and the following two effects will follow that. Due to rise in price there is an extension of supply represented by an upward movement along the supply curve and there will be a contraction in demand represented by an upward movement along the demand curve. The equilibrium is again achieved at new price at which the supply and demand match again.  Hence any dispersion from equilibrium is automatically recovered by the price mechanism (Mankiw, 2008).
Having stated that there has been downward trend in prices of houses in the UK in the last three years as shown by the chart below

Adopted from (Walayat, N 2009, httpwww.marketoracle.co.ukArticle8080.html)
From the chart above it can be noted that the price of houses started going down from mid 2008. However it grew from approximately 185000 in 2007 to approximately 205,000 august, 2008. Then downward trend began from approximately 205,000 august, 2008 to 165000 in January 2009.
As a result of house prices fall in this period obtaining house mortgage loans difficult. These factors are worsened the current housing crisis. While demands remain low, there is an increase in the number of homes in the market hence, house prices continue to fall (Sprague, 2008).

FACTORS DETERMINING DEMAND AND SUPPLY OF HOUSES OF HOUSES
There are many factors that are influencing the consumption of houses in the UK and they include
Growth The current financial crisis has made the growth rate stagnant in the UK and many people lost confidence in the economy as the real sector is subject to a high level of risk. This affected the price of houses.  For example the national went down. GDP mainly indicates the sum of goods as well as services produced in an economy. It can be looked upon as the most important indicator of growth of an economy. The current crisis has a huge impact on the growth of the housing sector. The growth rate was only 1.5 in 2008, which reduces to 1 in 2009. Consumer spending also reduces to 0.2 and a significant drop in the investment level. The price of housing also shows a declining trend. The mortgage approval falls by 70.

However the UK economy is strong and prices of houses did not fall as in the USA.
Immigration The number of immigrants to UK played and important role in prices of houses. Immigrants have become vital labor sources in several key industry sectors particularly manufacturing, construction, agriculture, domestic service, and other services. The immigration of health care providers to these UK can be attributed to stability of house prices in the UK. Moreover, opportunities open up for these workers to gain a better life in abroad in contrast to economic problems in their countries of origin.

Employment Opportunity This financial crisis expects to cost at least a number of jobs in the UK and unemployment increases to 7.8, from 5.3 in the year 2008.  Uncertainty is the main cause which reducing consumers confidence and at the same times the level of spending across the world (Jones, 2009).

Public Policy and Economics for Development  Public policy of housing also played an important role in determining the price of houses. Therefore an economic policy may enable or prevent development, and how a government may define the direction of the societys progress. When it comes to the aspect of development, public policy fuels a number of initiatives that ensure goals are designed according to the needs of the population.  However, the feasibility of these policies is dependent on the capacity and capability of the government to deliver and manifest these goals into working programs (Just, Hueth and Schmitz, 2004).
Setting this in the setting of policy-making, a government needs to decide which policies are the priorities as based on the available resources.  For instance, a government may have health, education and security as its top priorities from there, a bulk of the governments resources will be directed to the programs that are created according to the policies in these areas (Perkins, Radelet and Lindauer, 1996).

According to OSullivan and Sheffrin (2003), economic development pertains to the means to increase the standard of living of the population through the improvement of their economic, political, and social well-being.  Translating these into actual government programs may not be as easy, but basically, the idea is to ensure that the populations basic needs are met.

Kaplan, Shema and Leite (20080 defines public policy as a system of laws, regulatory measures, courses of action, and funding priorities.  With this, public policy is therefore formed through a range of needs in which interest groups emphasize which of these areas and sub-areas cater neither to nor to the publics interests. 
The economics of public policy steps beyond scarcity, opportunity costs and marginal analysis primarily because it is integrated with ethical and moral issues, especially as the government takes steps towards providing development in a greater sense.  How public policy is created is based on governance, and how a range of resources --- from wealth to power --- can create the best channel that would incite growth and create an environment of well-being for the entire population.  The created and passed policies therefore reflect the rationality of the government, its prioritized issues on scarcity, and how the conducted marginal analyses have led to the most effective solutions across the social, economic and political challenges of the society.

Inflation  Inflation played an important role determining the price of houses in UK. At that time another bubble was created following the housing bubble and it was the commodity price bubble. The price of houses increases from  160,000 to 205,000 from 2007 to 2008, which implies larger share of spending in houses, which reduces the growth rate in real estate sector. The combining effort of lowered food and oil price leads to reduce the inflationary pressure. Another reason for price inflation is falling is that the demand for goods, services is slow. This situation encourages the consumers to hold back their spending as prices are expected to fall further. It my cause a deflation in the economy which further discourage spending.

SUPPLY AND DEMAND
Rising rents and decrease in low-income housing caused housing rent to represent as much as 40-60 of earnings among poorer families. Availability of cheap and easy mortgages made buying a house attractive in the USA. As demand rose, so did the prices. The result was a phenomenal rise in housing prices evidenced by annual appreciation of housing prices by over 7.6 in 2000-05 and 11 in 2005-06  compared to 1 in the 1990s (Altman, 2009)  leading to overvaluation of houses in 2007. When people were unable to pay for the houses, house prices fell and made obtaining house mortgage loans difficult.  This lead to the following change of demand and supply of houses
                                             
With the injection of loans in the market through cheap funds source people will have more money and the aggregate demand (AD1) will move to AD2 curve thus shifts to the right. This will force real estate investors to raise prices houses. Contractors face the same problem, they have either to raise prices or suffer shortages since they do not have the capacity to build more houses at the same price without a simultaneous adjustment in labor cost. The reverse is true actually, with increase in money in the market labor and other input costs rise and the aggregate supply (AS) curve shifts to the right and upwards. The result is  inflation. Notice the marginal increase in quantity with substantial increase in prices. This will be illustrated as shown below

EMBED AutoCAD.Drawing.15 
Costs involved Construction costs in recent years have been quite volatile and unpredictable. This is due, in part, to the instability of the steel market, where costs often are more than house prices. The framing system of a building typically accounts for 10-12 of the total building cost. When compared with concrete products, steel is typically 5 cheaper overall than concrete (Lawrence, 2002). This causes the price of the house to go up.

Environmental Effects All construction materials are limited and extraction of them contributes to pollution of the air and water. Energy is also required to process these basic materials. However, there are differences in the environmental impact of differing materials, and these can be assessed in terms of sustainability (Givoni, 1998).

Wood is a renewable resource, yet there are no uniform guarantees that wood utilized is being replaced, if these new trees will continue to flourish in the same locations as before, or even if those trees are of an equal character. Steel, on the other hand, is infinitely recyclable with no loss of use.
One of the responses to this global challenge is the development and implementation of a process by which damage to the environment can be measured, and by which one can determine the part of the process in which most environmental damage occurs. Analysis of these stages has led to reliable data which predicts a buildings impact on the environment and to the development of newer, more eco-friendly materials which will serve the same purpose as older, traditional materials. In the case of steel used in the construction of the built environment, newer production processes have led to a kind of steel manufacture which is much less harmful to the environment.

House Quality The quality of houses helps to determine price of houses. The quality affects also safety of the house.

Sustainability Rate of resource depletion, recyclability, energy required in manufacturing, and comparison of different types of materials are important for overall sustainability. As long as key social, economic and environmental issues are maintained, green steel technology are not only sustainable, but necessary for the earths future.

Availability of financing  The availability of cheap financing sources will provide funds to consumers to purchase houses.  However, in the last three years the economy experienced a down turn which contributed to the consumers inability to purchase homes. This is because the source of finance became very expensive, trying the prices off houses down trend. The demand and supply curve for the last three years has been shifting to the left as shown in the graph below.

It is important to note that prices came down supply of the houses also reduced. This reduction is the net effect of reduction in source of financing.
Location Prices of various houses in eastern London become expensive as thee western sides of London were cheap. Houses in major town in United Kingdom were fairly expensive as compared to those in rural and distance suburbs.  As the financial crises started affecting the macroeconomic factors people started moving to cheaply priced houses driving the price of houses in posho estates down. A bad location for house will have reduced interested buyers thus reducing the price downward.

Perception The perception of the people in the United Kingdom contributed greatly affected the price of some houses in the United Kingdom.   People viewed manshionates semidetached houses and bungalows has cheap houses since they are easy to live in. this perception contributed to the changes in price in the area. Also people move around in the estate to find whether there is a house for sale in a reduced price or with a discount this is majorly because of the financial crises. This behavior affects the performance of houses in the market.

Social changes Social behavior has changed drastically in the United Kingdom because majority of people currently appreciate renting a house as opposed because the idea of acquiring a house is currently not as important as it was in 1980s. This also contributed to the downward trend of house prices in the United Kingdom.

FUTURE TREND OF HOUSE PRICES 
With the recession of date, the U.K. real estate industry has been affected from the financial crisis from large lenders and brokerages, allowing the necessity for governmental and political infusion into the industry. The real estate sector experienced a 19 fall in price over 2008-2009, with large losses experienced in urban centers and high level of unemployment. With the fate of real estate at the hands of public policy, prices have been continually dampened by falling rents and lease provisions and an increased cost of funding for houses (House. (n.d.)).

Because the real estate is considered an essential, thus the UK Government has also implemented various strategies to restore consumer confidence. Whereas confidence in U.K. real estate s in general has plunged in last three years, many people continue to express confidence in the sector (Hassell, 2003). The future prices will be as shown in the chart below

Adapted from Walayat, N 2009
From the chart it shows the prices of houses will continue to come down to the value of 129,000 in the year 2012. These will a big fall from the prices of 2007 that were as high as 200,000. This will be considered as 16 decline per annum something that has never been witnessed before.

In order to stabiles market prices of houses various incentives should be implemented both fiscal and monetary. The government should encourage banks and mortgage companies to reduce interest rent but to increase creditworthiness evaluation of customers I order to allow many people access sources of financing to acquire homes. The government should also pass a law which will be used to compact complexities that have arisen due to the risks associated with the industry. Taxation has an impact on acquirement to development functions and outlook of the sector therefore it should be reviewed to make sure that the sector recovers.

If direct and indirect taxes in real estate are reduced there will be a resurrection of affordable housing, demand will increase and the government can claim to have fulfilled its responsibility of providing housing to larger number of people. It is known that profit margins in affordable housing are much lower than the mid and luxury segment but the state can for some time introduce tax holidays for low cost and middle housing which will increase demand and revive the entire sector, eventually leading to a big boost to the entire economy. The governments should give a tax holidays in real estate and infrastructure projects such as airports, highways, roads, ports and water supply projects. There should also be a move to encourage the government to extend tax holidays in the development of integrated townships. Such measures will go a long way in reviving the economy since a number of economic activities are generated from the real estate sector. If projects with lengthy gestation periods are exempted from the corporate tax provisions in keeping with the spirit of economic development, significant growth can be achieved in the sector.

Commercial real estate is considerably burdened with service tax and firms are on the constant look out for the government to either abolish or reduce the tax. Service tax is a considerable burden on consumers also in view of its impact on the final price of real estate products. Tax implications can result in the improvement of liquidity, which cannot be denied by any economist because such measures assist real estate firms to invest in new projects in addition to having extra time in repaying the loans taken for their projects.

As the UK economy begins to rebound, the ability to accommodate to economies of scale will translate into profound success for this industry. Accordingly, the major economic indicators relevant for this industry are the 3-month LIBOR-OIS spread and Prime Interest Rates.

Since the slow down of the housing market severely affects the financial market, and the economy, slowing down the number of foreclosures may be the first step in the recovery of the housing market Sprague (2008). As a first step, Banks should tighten their lending requirements and increase the interest rates to discourage people from borrowing to purchase new homes. However, lending to eligible applicants has to commence again. A combination of these two actions will help reduce the inventory of homes on the market and stabilization of house prices. Drop in inventory of homes will spur increase in the construction of new homes, improving cash flows and employment, and increased spending on housing and private construction. However, realization of the benefits of such actions will take some time (Smant,  n.d.).

Foreclosure is a reality and needs immediate attention. Homeowners deserve to retain their homes especially that they have paid for them. Government legislations which assist the homeowners while easing the housing crisis, would be effective since it protects both, the people and the industry.

The Nature of the Firm

Perhaps the most influential essay providing economical explanation of the reasons why individuals choose to partner or form companies and business entities instead of bilaterally trading through market contract is The Nature of the Firm written by Ronald Coase in 1937. In the article, Coase poses a very important inquiry regarding the expectation of emergence of firms. Two questions are asked to help us in the inquiry why we should expect the emergence of firms and under what conditions such expectations are likely. These questions are posed given that the process of production could be done devoid of any firm or organization (Coase, 1937, p.386). 

Major changes in economy can influence the performance of a company in the market. Some changes do can turn out to be favorable to one company and completely opposite to the other. The past year has not been favorable to Cadbury Food Company which has turned to selling some of its outlets to other better performing firms like Kraft pizza. It had an initial intention of selling out its shares to Swiss food giant Nestle but nestle declined. Other companies which were interested in the takeover bid were Hershey and Ferero from Italy but Kraft was boosted by its large capital base (Blackaby, 2010).  The emergence of modern firms only occurs when entrepreneurs start to recruit new employees. As an effect of this, the analysis Coase gives in the Nature of the Firm, carefully considers the condition under which it creates meaning to an entrepreneur to search for the hired assistance instead of contracting for a given role.    During Coases time, the traditional economic theory proposed that because of the efficiency of the markets, it may even be cheaper to contract out for a particular task than undergoing the long process of hiring. This theory considered the efficiency of the individuals already in the field who have the proper know-how in providing goods and services at even a cheaper rate. 

The two aspects quality and cost made the earlier theorists to recommend contracting than hiring. In his article, Coase notes that a number of costs especially the transaction costs are encountered in marketing. There are costs for obtaining various goods and services through the market which could even be higher than the actual price of the good (Bob, n.d, p.1). Other expenses apart from the costs incurred in obtaining the goods or services include the information and search costs. The enforcement and policing costs, bargaining costs and costs incurred in keeping various key secrets of the trade can all result to an increased cost of procuring items from a firm. According to this observation, there is an indication that firms will only emerge when they can plan to produce whatever they internally require and in a way try to do away with the costs. However, a natural limit exists on what qualifies to be produced locally or internally. In the article, Coase identifies the declining returns to the function of the entrepreneur which includes the overhead costs increasing and the increment of the probability of the excited manager to commit some mistakes in the allocation of resources. This a situation normally referred to as the countervailing cost incurred in the use of the firm.    

 Coase makes an argument that the overall size of the firm is as a result of searching for an optimal balance between the contending tendencies of the costs. The size of the firm is best measured by the number of contractual relations which are local or internal to the firm and those which are external. Generally, expanding and making the firm larger will seem to be an advantage at the initial stages (Coase, 1937, p.389). However, there will be a welcome of the decreasing returns which will come in shortly after the firm is expanded. The decreasing returns will also prevent the firm from its expanding indefinitely. The sale takeover of Cadbury by Kraft after 186 years existence could best sum up this argument. However, such takeovers are not given a sweet welcome especially by people who feel that the legacy should have been protected at whatever case. In this case, the great grandson Peter Cadbury of the founder George Cadbury felt that the company was only sold for a short time gain (Blackaby, 2010).   

In situations where all factors are kept constant, the firm will tend to get larger. There are some consequences that will automatically be felt when the firm gets larger.  There will be a reduction in the costs of organizing the firm and the rise in the costs will be a little slower with an increase in the organized transactions. The increase in the size of the firm will also result to the reduction of the propensity of the entrepreneur to commit mistakes. There will also be a smaller the augmentation of the mistakes which will be followed with the increase in the organized transactions. In addition, there will be a higher the reduction of the price of supply of the production factors to large firms.  

 In Coases analysis, it can be seen that the first two costs will automatically increase with the spatial transaction distribution which are organized and the transaction dissimilarity. His analysis can exactly explain why modern firms tend to have a different geographic location or even carry out different functions. In another perspective, the change in technology has resulted to the mitigation of the cost of transaction organizing around the world which has significantly caused firms to grow large and larger. For instance, the invention of telephone and affordable air travel has increased the sizes of different firms (Bob, n.d., p.3). Similarly, internet applications and allied modern communication and information technologies have led to the existence of the commonly known as virtual organizations which have no geographical boundaries.   

Unfortunately, Coase never considers the non-contractual relationships such as that which exist between a father and a son or other members of a family. He gives a lot of weight to non familial transactions which exist in business environment. He makes several important conclusions which are appropriately applied today in the field of economics and the running of a firm. Concerning authority, Coase points out that the market operation in deed costs a big deal and through the formation of organization and permitting some authority who can be an entrepreneur in directing the resources, a lot of marketing costs can be salvaged. The required scenario is the entrepreneur to be in a position to perform his functions at a minimal cost having in mind that he may have a propensity of having the factors of production at a rather lower price than the transactions in the market. The reason to Causes observation on this note is because it may always be possible to revert to the open, market in case the entrepreneur fails to carry out this function.
   
On what actually determines the size of the firm, Coase clearly identifies that there are other factors apart from the supply price variation. These factors include the cost of organizing and the related costs incurred through mistakes which ultimately increase the spatial distribution of the organized transactions (Coase, 1937, p.400).    The Economist Ronald Coase contributed greatly to the field of economics which he offered with a lot of dedication to observe a lot by watching. Through this venture, Ronald Coase won a Noble Prize and has throughout time been asking other economists to pay keenness to observation. The economists should be keen in trying to understand the reason why events are taking the course they are taking rather than having a theoretical basis on their arguments. Otherwise, the economists will end up wondering why the world may not conform to their theoretical models of reality. Instead, economists should be led the way to observe the organization and structures of the industrial activities before even making theories of them.

Auto Industry

There have been several competitive forces which have contributed to the positive growth of Auto Industry in the United States. In this article we will discuss the impact of these forces.

U.S. Automotive Industry
There could be several forces that may have affected the auto industry in the US. We restrict our discussion to the following factors  Supplier Power, Buyer Power, Competitive Rivalry, Threat of Substitution and

Threat of New Entrants.
Before analyzing the competitive factors which may have fueled the growth of the automotive industry it is important to know that the history of the Automobiles can be divided into five eras Vintage era, Pre WWII era, Post War era and modern era.

Among all the factors Buyer power was one of the major factors in the growth of the U.S. automotive industry in its earlier phases because one of the major buyers was US army which was able to fund the research and buy the cars during the world war era.

Before the world war era the growth of industry and hence the industrial revolution was one of the other reason for the growth of auto industry , moving commodities produced at one state to another required automobiles and this helped shaped the automotive industry.

The economic stability of US government also helped in the development of the auto industry as it was able to support this industry. As the US government and policy makers realized the importance of the automobile it development was further pushed and several legislations were passed to enhance the development of the cars and hence helping the automotive industry. Even after all these governmental initiates it could not have been possible without the buying power of the customer that the auto industry saw its tremendous growth.
The World War II helped create a scenario where are lot of Research and development was made to improve the cars, this may be considered as one of the largest factor in the development of the auto industry in US.

It is important to know that throughout the veteran car era, however, automobiles were seen a novelty rather than an authentically useful device. The cars manufactured during this era consumed lot of gas and broke down frequently and was obviously expensive and common people were not able to afford it. It was not until the long drive by Bertha Benz in 1888 that made people aware of the importance of this invention.
Competitive Rivalry could be the second major reason of the growth of automotive industry. In the earlier phases of the U.S. automotive industry  there were several companies that tried to manufacture automobiles they spend great deal of effort in building new and improved designs with fuel efficient and unique engine designs but today there are only three large automotive companies that rule the U.S. Auto industry. The competition among these companies produced better cars with cheaper prices and more luxury. The other companies ended in failure of were bought out by the larger and financial better off companies. The reason of failure could also be attributed to the fact of poor designs and bad marketing efforts.

Threat of Substitution and Threat of New Entry are other important factors in the recent history of US automotive industry. Today the major auto manufactures in USA are General Motor, Ford and Chrysler. In the past only those automotives companies were able to survive which came up with new designs and produced cars which were economical and liked by the people based on the comfort and style, these companies struggled big time to stay on top and avoided substitution by other companys designs and this way avoided the new entrants into the market.

The failure of Ford can be related to this scenario because it produced designs that were not liked by the consumer and the Japanese automobile Toyota and European makes who were the new entrant also increased the competition and slowed the growth and business of Ford.
Today the competition that drives the market is the electric vehicle and it is because of the several laws that have passed and only companies which will be able to produce promising and better automotive designs would survive.

In this essay we discussed the growth of automotive industry in the US and the competitive factors between the companies that may have affected the growth. It can be easily seen that the Competitive Rivalry and Threat of New Entrants were the major factors that fueled the growth of this industry and in the future competitive rivalry would play a large role in the automotive industry growth.

Environmental Nature

Every nation has different types of resources. Some of these resources may be internationally traded while some other resources may only be sold and used locally. All those resource that can be sold or rather used locally are the ones that are referred to as non-traded resource. Resources are classified as non-traded due to some reasons. The first one is that they may have no international value or market meaning that no one will buy them in the international market such as firewood, or it may be very difficult to export them and therefore they must be used locally for instance the city council water. The third reason why goods may be non-traded is the fact that the government does not allow export of such resources. (Diamon, P,  Hausman, J.)
It is therefore obvious that there are some issues that will arise while trying to fix the value of non-traded goods. The first issue is that most of these goods are local goods and services are locally produced and in most cases by the government or rather by parastatal. It happens that they are monopolies and therefore there is very little competition. By the fact that there is little or no competition, some of the good are poorly produced and the customers will only use them because they are in need of them and not because they are the best products.  (Kolstad)
In addition, due to the nature of the good and services that are non-traded, it happens that even the consumers or the customer are not willing to buy them. This eliminates the nature of a normal market that is usually important for any good or service to be traded. This makes it even more difficult for the operators in the market to be able to know the actual value of the good or the service that they may be selling. A producer is usually able to fix the value of goods or services that he or she may be selling using the offers that are given by the consumers. If this offer is not there, it become very difficult to determine how much will be spent on this. (Diamon, P,  Hausman, J.)

A value that must be fixed for these goods and services must be reasonable so that people may buy them. It becomes very difficult to fix these values because there are some other issues that are involved in the process. First, there are some complementary resources which make it difficult for the consumers to be interested in the non-traded goods. For instance, instead of using firewood, which can be termed as non-traded good, people are turning into other forms of fuel such as gas which happens to be very cheap. This makes it difficult for the producers of firewood to fix the prices of firewood as none of the customers want to buy them because the price of gas is very low. (Nunes)

However, there is a way of dealing with this problem and this is through the use of the contingent value method which is commonly abbreviated as CVM. Using this method, the producers can reduce or rather deal with these issues which makes it difficult to have or to fix the value of the non-traded goods. Through this method, the producer can go into the market and infer preferences of the individual for public goods. Individuals in the public are the one who say what they want. Using this method, the consumer usually gives the maximum value that they want to spend on a certain goods. This makes it easier to fix the price of such a good because the producer will have an idea of the value that the consumer can buy the goods.  In addition,, this is known to solve most of the issue that arise from the trying to fix values of these non traded goods as the figure will only come from the consumer themselves.  (Perman, R. et al)

Macroeconomics Coordination

Funding adjustment involves decisions and arrangements that are immediately done and implemented.  In cases wherein the ADF and the ASF become unequal, it is inevitable that money users and money suppliers will react about the situation, which will pave the way for the magnitudes of ADF and ASF to approach each other. In the same manner, in instances when the GDP and the APE become unequal, the suppliers of goods and services also have to make important decisions through the output-price adjustments. However, output-price adjustments are not rapidly done as compared with funding adjustments because the former involves complex and risky decisions that have to be given due attention and careful implementation. In addition, funding adjustments is a prerequisite in order for output-price adjustments to take place (Ashby 61).

Funding adjustment could be observable in the domestic output of firms. There are firms that have just sufficient available money balances to make planned purchases and there are also those that have insufficient or more than sufficient money balances. In this scenario, firms that have insufficient and more than sufficient money balances will make decisions in order to properly manage their respective situation. There are various ways in order for firms that have insufficient money balances to have more funds and in the same manner, those with more than sufficient balances will also look for means in order to maximize its additional money balance. In relation to this, banks and other financial intermediaries have the responsibility to encourage and facilitate firms to borrow and lend money from each other as well as other regulating procedures that is necessary in the interaction of firms (Ashby 63).

In cases wherein ADFASF, the firms are not aware of this equality because they are more concern with their individual financial situation. A balance between the inflow and outflow of funds will take place when firms that have more than sufficient money balances will lend the necessary funds that are equal to that needs of the firms with insufficient money balances. In this scenario, financial intermediaries do not have to manipulate the borrowing and lending rates of interest, which also makes the level of interest rates unchanged (Ashby 63-65).

When ADF is greater than ASF, an inequality is observable, which the firms are also not aware of. The firms do not know that the total of funding is not enough in order to support the demand for it because there attention is on their individual funding situations. However, since ADF is greater, the total amount of funds that will be lend by the firms with more than sufficient funds will not be enough for the demands of the firms with insufficient funds. As a result, different financial intermediaries will raise the rates of interest, which they pay to depositors and also those that they charge to borrowers. By increasing the level of interest rates, ASF will increase as well as the APE and the ADF may fall. Financial intermediaries will continue to increase the interest rates up to the point that inflow and outflow of funds are equal with one another (Ashby 65).

In the scenario wherein the ASF is greater than the ADF, firms are still not aware that there is more supply of funding as compared with the demand for it. This is brought about by the same reason that firms are only concern on their own individual funding situations. In the situation that ASF  ADF, there are only limited borrowers for the funds while an ample amount of funds are flowing from depositors. Being the case, financial intermediaries will lower the rates of interest that they need to pay to the depositors as well as decreasing the charge for the borrowers. In doing so, the ADF may increase and the ASF will fall. Intermediaries will continuously lower the interest rates up to the point when both inflow and outflow of funds are the same (Ashby 65-66).

In relation to this, the two situations that involve the inequality between the ASF and ADF wherein one is greater than the other or vice versa will cause the adjustments in output-price. The nations producers have its respective reaction when it comes to their sales, which is related to the production situation. Nevertheless, the reactions of these nations producers are only based on their own situation because they are not aware of whether there is an excess or shortage of demand relative to supply. The inequality however, will be responsible in triggering the output-price adjustment process, which aims to lessen the disparity between the magnitudes of APE and GDP until its equality is observe. Despite the lack of awareness of the producers regarding the inequality, it is there actions that make APE and GDP equal together with the assistance of intermediaries (Ashby 81).

The process of macroeconomic coordination only takes place when there are disparities that exist among the GDP, APE, ADF, and ASF. This very process removes the gaps even without the intervention coming from the government. Furthermore, the process of macroeconomic coordination is also very astounding because it has the ability to eliminate the disparity among GDP, APE, ASF, and ADF without the awareness of the main actors of the process, which are also directly affected by it (Ashby 81-82).

Chapter 5 Macroeconomic Shocks Excess Demand and Cases   
In this chapter, there are four sections which has Case 1 (Demand-Caused Expansion), Case 2m (Money-and-Credit-Caused Expansion), Case 2c (Cost-Induced ExpansionDeflation), and Case 3 (Supply-Caused Inflation). These subjects would be the main topics which I shall give highlight in this summary.
   
The whole document has discussed the different cases in which different economies could have risen or have depreciated due to various instances. Similar to Case 1 it was mentioned that the rates of the interest level shall rise within the preliminary adjustment of funding which was known to be after the APE have already the arise. Afterwards, during the successive adjustment of the output price, the interest rates are assumed that it will continue to rise together with the increase in the percentage of employment in the country. In addition to this not only is the employment going to rise, its also assumed that output of production shall also be increased. Upon this, GDP  APE  ASF. Hence, first case implies that through adjustments of different funding levels as well as the output-price, there are great chances to which the employment rates would increase tremendously. Through putting lower prices for the production, there will be an increase with output of products and resources as well as the employment. Similar to a bandwagon, if everything would be following to the concept of the assumed case then the results will also be similar (Ashby, 90).
   
At the end of processes which had been done, there is an assumed situation such as employment, output and interest rates will increase however, and the prices would not change. Moreover, the aspects of output, employment, interest rates as well as prices shall maintain within these levels. However, changes shall occur if another shock or crisis shall be experienced by the economy (Ashby, 90).
   
The second case which is Case 2m is a situation in which following the rise of the ASF, the interest level is assumed to fail within the start of the funding adjustment. Moreover, for the period of the adjustment of the output-price, there is a great possibility that the interest rates shall be reversed together with the increase of the output and employment pending during GDP APE ASF. Moreover, the situation is similarly compared to a seesawwhenever one factor rises the other falls down and vise versa. Thus, although the relationship is connected to one another, there seems to be a very interactive yet negative effect imbibed by the two relative factors in this case (Ashby, 94).

Thus, after the process pulling down the price, it is assumed that employment and output shall continue its expansion. Moreover, without each factors, success will not be attained. The assumptions which are provided in the Case 2m, the process is that the employment as well as the output production shall be increased. However, the current interest rates shall be lowered. Through this, the price levels shall be retained.  Therefore, as mentioned by the author, the employment level shall be increased together with the production output. Although this is assumed, that these shall increase, the prices in the markets will not be decreased but will remain the same. There is also a great possibility that interest rates shall also be retained during the end of the process (Ashby, 94).
   
Furthermore, the second case is assuming that during situations which people are able to attain products due to their buying power. Through such concept, this view point assumes that changes within the prices are not necessary to decrease. Hence, the power of the people as well as the increase in the employment is the strongest factors in the situation. Through the power provided as the result for employment, the economy shall be stronger and better due to the buying power of the people (Ashyby 94).
   
In the Case of 2c, it is assumed that after that through the decrease in the price of production, there will also be an increase in the output as well as the employment of the people within the economy. Seeing the view of third world economies, it is known that labor is one of the most powerful yet simple ways of creating employments for its people. Through the support of resource producers the cost of production shall be lessened. Through this, there is also a drop in the interest levels and prices. Although there is an assumption that this concept shall retain the changes in the economy is also a contributing factor in the decline or strengthening of the economy (Ashby 97).
   
The Case 3 presents a process to which the decrease of the GDP is pursued by a slight decline in the interest rate. Moreover, the prices as well as the interest rates will immediately rise until the APE and ASF and shall be dragged down by the level of GDP. During the time that the GDP had gone down, it could still with stand the situation and slowly recover to its past level. Throughout the process of this case, the decline of the situation will be regained through the procedure taken by the country to win over the situation. Due to this situation, the concept of attaining the past strength of the economy is not assured.  Moreover, changes shall occur if there are cases to which the economy or the country has the chance to have changes such as events or direct foreign investments. Thus, an unexpected event shall be the only way for a movement to occur with the economy (Ashby, 100).

Chapter 6 Macroeconomic Shocks Insufficient Demand Cases
 In understanding the external shocks in macroeconomics, three important situations should be given due attention and importance, which are a decrease in APE, a decrease in ASF, and an increase in GDP. The implementation of the initial funding adjustment will caused these three scenarios to have inadequate demand for the current domestic supply of goods and services.
   
The decline in the APE would not immediately incur reactions or actions coming from firms. Firms will have to wait first and observe whether the demand is going to bounce back. In the case that the demand will not come back, the output-price adjustments will become observable, which entails lowering employment, output, interest rates, and prices. The main objective of output-price adjustment in this situation is to make GDP  APE  ASF. The employment and output will continuously decline until the prices increase in a level that will remove the negative economic profits. The end of the output-price adjustment, there will be a decline in the employment, output, and interest rates but the level of prices will still remain the same. In relation to this, the same levels of the employment, output, interest rates, and prices will stay at these new levels and will only change when another shock affects the economy (Ashby 106).
   
The decline in the ASF or the supply of funding of a nation will caused a substantial increase in the level of interest rates. Afterwards, the producers will respond to the fall in sales by means of an output-price adjustment. The processes involve in this scenario are the falling prices or deflation, decline in employment, output or recession, and interest rates, which will continue until equality is observe among the GDP, APE, and ASF. There will be a continuous decline in the employment and output, which will only stop when prices reached their previous level. After the process, employment and output will decline, interest rates will increase, and the level of prices will remain the same. Moreover, the levels of employment, output, interest rates, and prices will be the same and will only change when another shock emerged in the economy (Ashby 109).
    
In Case 5c, it is assumed that through the continuous spread of production cost will be present. However, the output and employment will be in failure together with the rise of the levels of prices and interest rates. Therefore, production cost shall be the main reason of decline instead to attaining employment, lower prices of goods as well as the increase of output. Moreover, factors relating to issues of production cost would not help in attaining the economic security which is required. In the process, changes are not likely to occur in these types of situations. Changes will only be present if there will be a shock within the economy of the country. (Ashby, 112).
   
Regarding Case 6, it is assumed that the fall of the GDP is responded with lowered interest rates. On the other hand, interest rates as well as prices shall rise harshly. During the time of APE and ASF is already dragged by the abridged level of GDP the active reaction of interest rates and prices. Though this is mentioned in the book that all of these activities are known to be temporary however, temporary is unknown (Ashby, 117).

Moreover, the factors that had created a GDP decline shall slowly change through different types of methodologies that shall be applied. As the fail was assumed, it is mentioned by the author that the fall of the economy shall be followed an offsetting rise. Thus, the economy will need to revert back to its starting point and shall suffer Case 4. After case 4, there is a great possibility that output, employment and interest rates shall be below its average level. Given this, the result shall be an unchanged level of pricing within the market (Ashby, 117).

HOW NEW ECONOMIC POLICIES LEAD TO SAVE GROUNDWATER

For the past thousands of years, the economy of the Arabian Peninsula depended on agriculture, raising livestock and trade. Agriculture was common in the eastern and southern regions of the Arabian Peninsula, raising livestock was common on the northern region and trade was limited to camel caravans and the annual visiting of pilgrims to the holy places in the Hejaz (holy cities, Makkah and Medina).
Saudi Arabia is located on the Arabian Peninsula and comprises around eighty percent of it, with the Red Sea in the west and the Arabian (Persian) Gulf to the east. Neighboring countries are Jordan, Iraq and Kuwait in the north Qatar, the United Arab Emirates, and Bahrain in the west and the Sultanate of Oman and Yemen in south. The total land area at Saudi Arabia is 2,250,000 square kilometers, and most land of Saudi Arabia consists of arid or semi-arid land. Arable of the land in Saudi Arabia is estimated by only 1.67 percent of Saudi land according to 2005 statistics and only 0.09 percent of the countrys land is planted to permanent crops.
The Saudis topography and climate are not homogenous between regions. So, in general the Saudi has a high mountains in the west, down almost to sea level in the east. Sandy plateau slopes downward to the Gulf, broken up by wadis, broad valleys. The extreme is reached in three deserts which extend from north to south. These deserts are  Dahna, Nufud and the Rub al Khali, the Empty Quarter. These deserts are followed by some oasis such as Hasa Oasis and Qatef Oasis in the west. After this oasis, there is a coast that lies on the Arabian (Persian) Gulf. In addition, the climate of Saudi Arabia is a long, hot and almost dry summer, and short, cold winter season during which little rain occurs and annual rainfall is less than 100 mm. From this general glance to Saudis topography and climate, reader can realize that Saudis external resource is very poor. There is a limited availability of land for agriculture there is no river and no lake. However, Saudi has good internal resources oil, water and minerals.
Population in Saudi Arabia was estimated in 2006 by 27,019,731, with an annual growth rate of 2.18 percent. Of the total population, nearly 6 million non-nationals were included. However, a harsh environment and small cultivable land made the agriculture too difficult. Also, the agriculture sector was the main sector in Saudi economy and many households were dependent on agriculture to get its income. However, the economic structure of Saudi Arabia was changed in 1938 when the United States Company discovered the oil in the eastern province.
In 1960, Saudi Arabia became a member of OPIC (Organization of Petroleum importing Countries) organization. This organization raised the price of oil which caused to increase on Saudi Arabias revenue. By the time, Saudi government tried to use that revenue in developing the country by developing human resources, the transportation system and other infrastructure aspects. In 1970, the modern economic history of Saudi Arabia started when the government began with Five-Year Development Plan. The main goals of these plans were to develop the Saudis living standards, develop non-oil sector, reduce dependence on the oil source, and achieving self-sufficiency in food production by developing agriculture sector.
    Self-sufficiency in food led Saudi government to use several different natural resources such as oil, land and water. The government invested the revenue which came from oil to develop the agriculture, also, used different policies to extend the agricultural sector vertically and horizontally. In another hand, the government concerned a specific committee to get the self-sufficiency in food, which is the wheat. So, developing this sector needed creating different policies to use these nature resources which they have scarcity in Saudi Arabia, that is land and water. However, to develop agriculture the water is an important input player. The primary water resource in Saudi Arabia is groundwater, which takes a lot of time to collect in the ground and it needs a lot of time to collect again if the present generation does not use it efficiently, and the agriculture consumed groundwater about 252046 million cubic meters since 1981 until 2000 and 77.38 percent comes from shallow water.
Problem Statement
Among the natural resources, the one with high economic value and social significance is the groundwater, which finds numerous uses in domestic, agricultural and industrial areas. In order to ensure sustainable usage, proper planning and understanding of the groundwater system behavior is required since the supply of groundwater is limited. However, excessive extraction of groundwater has resulted in progressive depletion of the resources and continual decline in its level. This is referred to as overexploitation of resources, i.e. when the total extraction exceeds the long term natural renewal of the groundwater system. As a result of lowering of water table, there was an increase in cost of drilling and pumping and reduction in well yield. Other associated adverse consequences were land subsidence and deterioration of groundwater quality.
Most of the Middle East Countries depend on groundwater and acres of agricultural land survive on it. With all the above said problems, mounting crisis and the need to keep the depleting levels of groundwater available for future generations and optimize its benefit, policy makers need to step in and look into efficient ways to minimize exploitation and increase productivity of groundwater.
In Saudi Arabia, water is the scarcest natural resource. Prime water resources are groundwater and it is mainly used for agricultural, domestic, municipal, and industrial purposes.
1970 marked the beginning of the modern economic era for Saudi Arabia. The Saudi government concerned with fulfilling its goal on self sufficiency of food, adopted some quick and effective strategies such as subsidies, free interest loans and distribution of land free to achieve these goals. All these strategies made agriculture sector grow faster and transformed deserts to green land.
But these policies had a downside, with growing agricultural lands and the need to achieve the goals, the government did not encourage the farmers to conserve water and cared less about farmers wasting water as water was available free sometimes and the value of it was not recognized. For instance, according to Ghanim and Aldwis (2003), in 1980, Saudi Arabia had about 500 million cubic meters of groundwater, but it declined to 289.13 million cubic meters in 1996, which meant that the groundwater declined by more than 50 percent within 16 years.
According to reports on self-sufficiency of food, the Saudi government had developed agricultural lands through different policies that led to increase in irrigated area from 1,220,000 hectares in 1974 to 4,359,544 hectares in 2005. As a result, with increase in demand for groundwater, the agricultural sector, deemed as the largest water-consuming sector, utilized about 90.5 of the total amount of water used in Saudi Arabia during the period 1980-1998.  Further, groundwater in Saudi Arabia can be classified as renewable and nonrenewable. And according to Ghanim and Aldwis (2003), the agricultural sector depends on non-renewable groundwater by 66.54, while dependence on renewable groundwater is by 33.46.
With Saudi governments policies on self-sufficiency of food, wheat became a strategic commodity.  The crop structure underwent a change in 1970 and the wheat considered as one of the main crops, represented 44.17 percent of the irrigated land while the formal main crop was the palm dates. Alguenibt (2004) acknowledged the huge requirements of water for wheat growth. According to him, a ton of wheat production requires 2000 cubic meters of water with salinity acceptable to levels of 1500 ppm. The wheat crop consumes 32 of deep non-renewable groundwater while consumption of all other crops takes the remaining 68. As observed, wheat consumes a lot of water and depends more on the nonrenewable groundwater.
All supporting reports clearly indicate wheat as the largest consumer of water in the agricultural sector. The subsidies given reduce the marginal cost of production and the cost incurred in pumping out the groundwater. This leads to inefficient usage and decline in the value of groundwater. To bring to note, according to Al-Ibrahim (2005), farms less than 50 hectares that cultivated wheat consumed 34 more water than what the ministry of agriculture had estimated. So, this wastage and improper usage of groundwater evinces the negligent nature and under recognized value of water.
The Saudi government has started to show concerns towards the mounting problem and the fact that groundwater is indeed undervalued, which would eventually lead to economical inefficiency. As this resource is limited, it needs to follow timely and proper distribution mechanisms to make it long lasting. Also, the government should improve groundwater resource management and save it for the future generations.
To solve this problem, the Saudi government should reevaluate its agriculture policies and adopt methods and policies that will make people aware of the water value, so as to conserve the water for future generations. Wheat, the largest consumer of water in the agricultural sector would be the first target. The government may center its policies around reduction of support prices, reduction of subsidies on input factors and opening the wheat market.
The objective of the research is to observe the dynamics of the equilibrium quantity and the price of wheat when the government makes a shock policy in the equilibrium wheat production by adopting a new policy and to determine how these policies eventually affect water conservation and its value.
There are different policies that a government could adopt, such as reducing the ratio of per unit subsidy rate, reducing the ratio of subsidy on water production, reducing the ratio of subsidy on the rest of the input factors (non water inputs factors), and reducing the ratio of subsidy on all input factors. By thorough study, the research could analyze the efficiency and viability of these policies, so a decision maker can adopt the best policy that has more effect in conserving the groundwater, heightening its value and at the same time maintaining the production of wheat. So, this research answers how each policy affects our future generation and production of wheat.
This paper is organized as follows. Section 2 presents a developing agriculture sector and focuses on production of wheat and wheat supply. Section 3 presents water sources in Saudi Arabia. Section 4 reviews policies to develop the production of wheat and how these affect water consumption. Section 4 deals with Equilibrium Displacement Model (EDM) that presents the results. Section 5 concludes and provides direction for future research.
Chapter Two
This chapter contains of two parts. The first part of the chapter shows how agriculture sector is developed and what types of polices the Saudi government used to develop this sector. Also, this part shows the developing in wheat production and views the government institution contributed to develop this crop.  Then, the second part shows the water resource in the Saudi Arabia.
Developing Agriculture Sector  
Agricultural sector has received increasing attention because through it the Saudi Arabia could achieve some of the objectives of economic development. The objectives were achieving food security, increasing incomes of members of the community, diversifying the production base, reducing the volume of imports and reducing dependence on oil as the mean source of national income. For that, the government adopted different policies to developing this sector.
To enable the agricultural sector to achieve this important role, the Saudi government adopted different programs and policies to support and encourage private sector to invest in agriculture sector activities. These programs and policies supported a farmer directly and indirectly.
In indirect support, it concentrated on building strong bases of agriculture such as providing electricity, drainage, secondary road system, and building dams until rainwater preserved. So, according to Agricultural Statistical Annual number 20 the lengths of agricultural roads, secondary road, in 2006 was 124157.03, and the number of dams increased from 209 in 2000 to 230 dams in 2006 with total capacity of 850327 thousand cubic meter.
In direct support, it concentrated on encouraging people to get involved in agriculture sector. So, it focused to support input like distributing uncultivated lands freely, met 45 of cost of agriculture equipments, and 50 of fertilizers cost, financing agricultural projects with free interest and purchasing local products with high price by Saudi government. So, accumulated land was distributed according to barren land distribution decree and number of beneficiaries up to the end of 2003 was 99544 and the total area was 668428 hectares.  Also, the total value of agricultural subsidies granted to farmers through the Ministry of Agricultureduring the period 2002 - 2006 was SR 199,328 thousands, and the total value of agricultural subsidies granted to farmers through the Saudi Arabian Agricultural Bankduring the period 1973 - 2006 was RS 12983953 thousands and the total value which it financed the agriculture projects during 1973  2006 was SR 9356.8 millions. All these subsidies helped the Saudi Arabia to get self-sufficient of important products especially wheat, dates, eggs, milk, and to increase the production of fresh vegetables, fruit, chicken, red meat. So, all these programs and policies encouraged the agriculture sector to growth.
All these programs we noticed above affects on the GDP. The agriculture sector was shared in the GDP, constant prices, by 3.6 percent in 1969, but the sharing in the GDP increased to 6.4 percent in 1989. In 2005, the agriculture sector added 5.1 percent to the GDP. On another hand, agriculture sectors GDP share in non-oil sectors increased by 6.9 percent in 1969 and increased to 9.1 percent in 1989, but it declined to 7.6 in 2005.
So, the main goal of developing agriculture sector is self-sufficiency of food and to reduce depending on food imports. The Saudi government looks to wheat as a strategy committee because from this committee made an important thing, which is the braid. So, the government would like to be the committee (braid) available to all Saudi people. For that, it supported the wheat industry directly and indirectly.
Production of Wheat
 The main cereal crops in Saudi Arabia are wheat, millet, sorghum, maize, barley, and sesame but the wheat crop represents the most important crops between all cereal crops and that will be clear from structure cereal crops. The wheat represented just 10 percent of the area which all cereal crops used, and it represent 23 percent of the production which all cereal crops produced in 1971. During 80s the wheat grew in area, used about 93 percent of all cereal crops area for wheat production and produced about 97 percent of all cereal crops production in 1985. In 2006, the area which wheat grew declined to 77.7 percent of all cereal crops area and it produced about 86.5 percent of all other cereal crops.
For that, production and productivity of wheat is growing during the last three decades, but there was diversity and vacillation of growing between increasing and decreasing in area and production of wheat. All this vacillation refers to multiple policies the Saudi government used it during the last three decades.
 The Saudi government had looked to wheat as strategy food, for that it encouraged farmers to invest in wheat. So, the government adopted some policies to support farmers to increase in production of wheat. In 1984, Saudi Arabia reached self-sufficiency when it produced 1,401,644 tons of wheat. Therefore, the government had followed two ways to get self-sufficiency of wheat. The first, expansion was vertical in order to raise production efficiency through the use of modern equipments and loans to farmers. The second was horizontal expansion through establishment of irrigation and drainage project, and distribution of arable land to farmers.
Even though Saudi Arabia has a limited cultivable area, the area of wheat has vacillation between increasing and decreasing. So, as a result of horizontal expansion, the area of wheat increased from 30,156 in 1971 to 468,271 hectares in 2006. Figure 1 shows how the wheat area in 1971 was 30,156 hectares and the area expanded to 404,079 hectares in 1984 when Saudi Arabia reached self-sufficiency. Even the Saudi Arabia reached to self-sufficiency, the area of wheat continued in expansion until it reached to 924,409 hectares in 1992, then the area started to decline until it reached to 468,271 hectares in 2006.



Also, figure 1 show how the production of wheat improved from 41,908 tons in 1971 to 2,630,394 tons in 2006. Production of wheat rose to over one million in 1984 when Saudi Arabia reached to self-sufficiency. Thus, production of wheat was exceeding the amounts needed for self-sufficiency. Producers had continued to grow the wheat and it reached 3.2 million tons in 1988. In 1992, the production of wheat rose to 4.1 million. Thus, Saudi government has changed its policy to reduce the production of wheat and the production declined to 1.2 million tons in 1995, and then it increased to 2.6 million tons in 2006.
The Saudi government supported vertical expansion of agriculture in order to raise production efficiency. For that, Saudi government has subsidized the farmers to use modern equipment as well as provision of extension services and loans to farmers. As a result, this kind of expansion noted productivity of wheat. The productivity of wheat has improved during the last three decades. In 1971, the productivity of wheat was 1.4 ton per hectare and it rose to reach 3.3 ton per hectare in 1983. In 1992, where wheat area and production was the highest, the productivity was 4.5 tons per hectare. Even the area and production of wheat declined after 1992, and after that the productivity of wheat continued to increase until reached to 5.6 tons per hectare.
Policies to Improve the Production of Wheat
The Saudi government followed incentive programs to develop the agriculture sector to get its goals which are verity national gross income and security food by reaching self-efficiency. The government used subsidies to extend vertical and horizontal extension on agriculture sector. On another hand, the government looked to wheat as strategy good and it represented the security food. For that, the government has supported this good by different types of subsidies. So, the government established two firms to imply different policies to reach the goals of growing the wheat. They are Saudi Arabian Agricultural bank (SAAB) and Grain Silos and Flour Mills Organization (GSFMO).
 The Saudi Arabian Agricultural bank (SAAB) established in 1964 and it started practicing at 1966. It is a government credit institution specialized in financing various areas of agricultural activity in all regions of the Saudi Arabia. The goal of SAAB is to support farmers by financing them with free interest and supporting by subsidies. SAAB finances agricultural projects with free interest for short run for working cost, med-run for small projects, and long run for a project which gets financing by more than SR five million. SAAB provides different kinds of subsidies like support wells and irrigation equipment by paying 50 percent of the official price of irrigation pumps and equipment, 45 percent for farm machinery, and 30 percent for poultry and dairy equipment.
SAAB contributes to develop the agriculture sector through subsidies and loans. SAAB financed about 133 projects by total value of SR 494.3 million in 1980, and 19.6 percent of the total value went to cereal and forage projects. Portion of cereal and forage projects increased to 59.7 percent of the total projects value in 1985 and this portion increased in 1992 to 82.7 percent. Since 1979 until 2006, SAAB had financed 1897 cereal and forage projects by 2942.3 RS million. In addition, since 1973 until 2006, SAAB had subsidized the engines and pumps by RS 5751518 million and it had subsidized agricultural machinery by RS 3951020.64 million.
So, SAAB was an important factor to improve agriculture sector but it was not the only factor that helped government to reach a self-sufficiency of food, especially in wheat. Grain Silos and Flour Mills Organization (GSFMO) contributed to develop wheat growth.
The government established a program which it is supporting price originated by Grain Silos and Flour Mills Organization (GSFMO). The goal of Grain Silos and Flour Mills Organization (GSFMO) is purchasing local wheat by high price from the farmers and providing flour to consumer for low price.
The supporting price program encouraged private sector to enter into the agriculture sector and invest in wheat project. GSFMO started to apply supporting price in 1980 when it purchased the wheat from farmers by SR 3500 per ton. In 1980, GSFMO received 32,882 tons and then increased to 1,346,943 tons in 1985. In 1985, GSFMO declined the supporting price to RS 2000 per ton but that did not reduce the amount of wheat which GSFMO had received. In 1992, GSFMO received 3.4 million tons. In 1995, GSFMO declined the supporting price to RS 1500 per ton and that price reduced the amount which GSFMO received to 1,647,957 tons. So, declining the support price and establishing quotas on wheat production reduced the amount of wheat which GSFMO received to 1,760,000 tons but it increased to 2,718,042 tons in 2004. In 2005, GSFMO reduced the supporting price to RS 1000 per ton and it purchased from producers 2,362,756 ton. Therefore, the Saudi government used the supporting price and quote programs and subsidies on input to control wheat production.
Also, the Saudi government used another policy to protect farmers who produced wheat. The government imposed a hundred percent import tariff on wheat and flour. Also, the government has been instrumental in distributing public lands under a Royal Ordinance that dates back to 1968. As of end 2003, about 3,294,645 hectares have been allocated. Of this, 20.3 percent went to individual, 70.3 percent to agriculture projects, 9.4 percent to agriculture companies. All these factors and programs were to get a self-sufficiency of wheat for Saudi Arabia because the government looks to this commodity as the most important and a strategy good.
Now, with Saudi Arabia as a member of WTO, there is something change with agriculture policy. SAAB restructures the agricultural subsidies. So, the subsidies include agricultural subsidies equipment, excludes subsidy to dig wells or pumps, and subsidy granted by 25 percent of the loan value. On another hand, GSFMO will begin reducing purchasing annually by 12.5 percent from season 2008 and it will import to bridge the domestic consumption gap. Also, the government will prevent to export local wheat. So, what is behind this new policy The main reason behind this new policy is water. Growing wheat depends on groundwater and most growers use fossil water to grow the wheat. Also, the government starts to be warred about water and manage water become important issue in Saudi Arabia. On another hand, agriculture sector consumes about 90 percent of the total water and the wheat consumes about 30 percent of what agriculture sector consume.
Water section
As we emanated before, the Arabian Peninsula has a harsh environment topography and climate. Under this environment, Saudi government adopted a huge program to develop agriculture sector and water became an important input to lead this developing. For that, the government invested in a lot of money to develop the water resource. So, in this part we describe how the government invested in the water resource and the water resources in Saudi Arabia.
Investment in water
Water is the most important input to develop the agriculture sector. Because the Saudi Arabia has harsh environment and the government followed water supply management, it adopted to invest in water sector. The government had started to invest surplus of oil revenue in water project. It started to harvest the rainfall by holding the rain to get high benefit from it by building about 230 dams of capacity 850327 thousand cubic meters in the western Saudi Arabia where the mountains are located. The largest dam is King Fahd dam, which holds 70 million cubic meters. The dams are used for agriculture and domestic uses.
Also, Saudi government invested a lot of money to provide water for municipal use by building about 35 plants. In addition, the government invested to build irrigation water projects such as Project Irrigation and Drainage in Al-Hasa, which service more than eight hectares. Therefore, the government invested the surplus of oil revenue to increase the water supply. Also, the government supported farmers by subsiding irrigation equipment, drilling wells and pumping machine.
Water Resource in Saudi Arabia
1- Rainfall
The first water resource is rainfall. Saudi Arabia has no rivers or lakes and surface runoff is intermittent because of the erratic nature rainfall. The amount of rain received is less than 100 mm annually, and the resulting runoff is estimated at 2025 million cubic meters. This amount of water distributes to three parts. Thirty percent of this amount is diverted for agriculture, 45 for recharging groundwater aquifers, and 25 is lost by evaporation (Abdulrazzak and Khan, 1990). So, Saudi government has invested a lot of money to collect this amount of water by building about 230 dams.
2- Groundwater
The second resource of water is groundwater, which is the main source of Saudi Arabia. The groundwater divides to confined aquifer (fossil water) and unconfined aquifer (alluvial aquifer). Saudi Arabia has seven major deep aquifers, which they represent the main water source and they are used by agriculture, domestic and industries. Ministry of agriculture estimated the amount of water in the aquifers by 500 in 1981 but it declined to 289.13 million cubic meters in 1996 (Qanem and Aldwis, 2003). Here, the next table shows a summary of groundwater reserve in principal aquifers in million cubic meters (MCM). These aquifers are located in the central part of Saudi Arabia, and the largest reserve is Wasia, which is located near Riyadh.
Main aquifers in Saudi Arabia
AquiferMean annual recharge(MCM)Reserves (MCM)Mean TDS (mgliter)ProvenProbablepossibleSaq
Wajid
Minjur and Dhruma
Wasia
Umm Er Radhuma
Dammam
Tabuk250
104
80
180
406
200
45565,000
30,000
17,500
120,000
16,000
5,000
560100,000
50,000
35,000
180,000
40,000
----
----200,000
100,000
85,000
290,000
75,500
----
----300-3250
500-1000
1100-2700
400-4600
500-4050
1100-2660
460-3700Source Abdulrazzak and Khan 1990
3- Desalinated Seawater
The third source of water is desalinated seawater. Saudi Arabia is the largest country in the world, which produces the water from desalination and it had 35 plants in 1997 to produce the water. The plants distributed between the eastern and western coast. The total water production of desalination plants increased from about 200 million cubic meters (MCM) in 1980 to 540 MCM in 1990. Then, it increased its production to 795 MCM in 1997. Desalinated water production is expected to reach about 1300 MCM in 2010 and more than 200 MCM in 2025 (Abderrahman, 2001). In 1990, desalinated water production was about 33 of total domestic and industrial demand, and then the water production increased to 38 of total domestic and industrial demand. By 2025, desalination production is expected to be about 54 of the total domestic and industrial demand (Abderrahman, 2001).
4- Treated Sewage Water
The final source of water is treated sewage water to use for agriculture purposes. Saudi started using sewage water as source for water since 1980. In 2003, treated sewage water served 17304 hectares and agriculture area used 51.33 million cubic meters.
To summarize the water resource in Saudi Arabia, there are four sources for water. The first one is groundwater which is the main source for water and represents 86 of total water supply. The second one is surface, which is a collection of rainfall in the mountain behind the dams. So, the surface water represents 9 of the total water supply. Then, the desalinated seawater represents 7 and treated sewage water represents 1 of the total water supply.
Categories of water Resources and Their Percentage Share of Water Requirements
NumberWater resourcesPercent share of water requirements1
2
3
4Groundwater
Confined aquifer (fossil water)
unconfined aquifer (alluvial aquifer)
Surface water
Desalinated water
Reclaimed wastewater
Total
77
9
6
7
1
100Source Mohoriy and Grigg Journal water resources planning and management.

Sources of irrigation water and Improved Irrigation System
Groundwater is the primary source of irrigation area in the Saudi Arabia. According to Minatory of Agriculture 1999, there was 85.46 percent of the total irrigated area in Saudi Arabia, which estimated 1.19 million hectares dependent on groundwater. Rainfall is the second source for irrigation where there is 13.97 percent of irrigated area and some irrigated area used treated sewage water as a supporting source. The most of agricultural production in Saudi Arabia depends on groundwater except Jizan. Jizan depends on rainfall by 83.85 percent of its irrigated area (Alomran, 0000).
The main means of rationalizing the use of irrigation water is raising the efficiency of irrigation systems and use modern irrigation systems such as drip irrigation or spraying. Therefore, irrigation systems have been developed in Saudi Arabia. According to the comprehensive census in 1999, there was 47.68 percent of the total irrigated area that used modern irrigation system, followed by the traditional irrigation system were 30.3, and the irrigation system in more than one way by 22.2 during the same year. The modern irrigation systems deployed in parts of the Saudi Arabia where the rate in the eastern region is about 82.5 of the irrigated area. In Jawf and Tabuk, 82.14  69.32 of the total area was irrigated in each region.
Saudi Arabia has a limited water resource and the main water resource is groundwater. Agricultural sector is the largest consumer of the water. So, as a result of scarcity of water, Saudi government invested a lot of money to structure a large number of projects like dams and Project Irrigation and Drainage in Al-Hasa. Even though, Saudi Arabia still suffers of water deficit.
Chapter three
This chapter contains of two parts. The first part shows the Equilibrium Displacement Model through reviews of the previous studies and show different studies that used this model in different fields of economy. The second part views the construction of the Equilibrium Displacement Model we used in this study and how we build it. Here, we build base of a set of basic equations to describe the demands and supplies of both product and factor. Then, we used total differentiating these equations and converting them to elasticities. The elasticities yield a system of linear elasticities model to examine the different policies the Saudi government could use to find the effective production of wheat and saving the ground water.
Theoretical and Model Section
Market Equilibrium
    Under competitive market, the price and quantity equilibrium founds when the supply and demand curves interact.     At this point the quantity supplied equals the quantity demanded and the price which the producer will accept equals the price which the consumer is willing to pay. So, when the price increases (decreases) that will lead to surplus (shortage) of good or service.
Change in Market Equilibrium
We have seen how the price and quantity of a good or service determines in a market when the demand and supply curves intersect. Also, we have acknowledged about how supply and demand shift as a result of response to change in such variable as capital costs, raw material cost, income, population. We divided the variable which affects the demand and supply to two kinds. Endogenous variables are the quantity and price which are in the model but exogenous variables are what the value determined outside the model. Now we will see how that equilibrium changes in response to shift in the supply or demand curve or both of them when the exogenous variable changes.
There are several variables that cause to shift the supply curve to right, left, upward or downward and any shifting will cause to change in equilibrium price and quantity.  One of these variables is input costs or raw material cost. Input cost could reduce by subsidizing when the government intervenes. The subsidy reduces the cost of input and leads the supply curve shift to the right which led to increase the quantity of supply. As result of shifting the supply curve, the equilibrium point will change. In addition, when variables, which affect on demand curve change, the demand curve will shift and the equilibrium price and quantity also will change. Also, the changing in the equilibrium point could happen because there is a change in demand and supply together.
Equilibrium Displacement Model
    An equilibrium market can face shocks from a change in exogenous variable. The change on exogenous variables leads to destruction of the equilibrium market. To measure the change on equilibrium market, there are a lot of studies used in equilibrium displacement model. The equilibrium displacement model examines the effect of a change in exogenous variable. So, the equilibrium displacement model studies the impacts of small and finite changes in exogenous variable. The endogenous variables are measured as proportionate changes and are a function of proportionate changes in exogenous variables. Also, the EDM is useful to exam the impacts of multiple changes in exogenous variable.
The equilibrium displacement model has frequently used tools in agriculture economy. The equilibrium displacement model concerns about the proportional change on endogenous variable with respect to a proportional change of some exogenous variable. This model was developed by Muth (1964). Muth developed the reduced forms for proportional displacements from equilibrium for a system of equations of supply and demand for a product dependent on two factors of production and exogenous shifters for each of the functions. So, through elasticities and shared parameters and proportional change of exogenous variable, we can estimate the proportional change of endogenous variables. Muth applied this model in his own field of special interest, which is housing and urban land economy.
The EDM has some characteristics, which they made it as important tool in agriculture economy. According to Piggott 1992, the EDM is relevant in cases where sufficient data for econometric modeling may be unavailable, data are unreliable, or where data and extensive prior research results and experience are available to develop large-scale models of complex relationships. Also, Piggott 1995 noted the equilibrium displacement model be more clear with four assumptions which are (i) elasticities of endogenous are known and constant, (ii) elasticities with respect to exogenous variables are known and constant, (iii), technology of production is known and constant, (iv), Displacements are restricted to be in the neighborhood of equilibrium.
Additionally, Davis 2001 said the EDM formwork is appealing for three reasons (i) it is extremely flexible in modeling diverse economic phenomena ( ii) it is easy to implement as it only involves inverting some matrices of parameters that are not wed to only particular data set (iii) because of two, the results may be considered rather robust to econometric misspecifications.. On another hand, some of the studies used the EDM to analyze the effects in vertical market such as Alston (1991) and Salhofer, and Sinabell (1999). Also, there are some studies that used this model in horizontal market like Piggott (1995).
There are a lot of researchers who used the equilibrium displacement model in different topics. Gardner (1975) used this model and applied to investigate the relationship of retail food prices to farm prices. Sumner and Wohlgenant (1985) applied the term equilibrium displacement modeling to measure the effects of an increase in federal excise tax on cigarettes. In that study, Sumner and Wohlgenant (1985) used a log-linear equilibrium displacement in international trade.  In 1988 Mullen, Wohlgenant and Farris used this model to examine the distribution of surplus gains in substitution between farm and non-farm inputs and Alston has a paper which is research benefits in a multimarket setting a review to evaluate distribution of welfare effect.
Also, there are some researchers who used this model in international studies. Duffy and Wohlgenant (1991) used this model in international trade to measure the effects of an export subsidy on the U.S cotton industry. Also, in 1995, R. Piggott, E. Piggott, and Wright used  and analyzed the effect of incremental advertising expenditure by the Australian beef, lamb, and pork industries, domestic and export markets. Brown (1995) used EDM to measure the effect of cigarette taxes and smoking restrictions on tobacco price and quantities, and revenues to tobacco producing. Beghin, Brown, and Zaini (1996) investigated the impact of domestic content requirement on the US tobacco and cigarette industries. Al-Sultan and Davies used the model to measure the impacts of WTO and water policy change on Saudi Arabia. Bradley and Sumner (2008) assessed the effects of trade barriers and domestic support by simulating the effects of policy reform on global processing tomato markets.
Constructing the EDM model
    We design a system simulation model to assess how changes in financial policy and import of wheat affect the production of wheat and demand for input factors. The system contains of basic equation in the domestic wheat market, which are demand and supply. But these equations have a variable, which the Saudi government is controlled that is subsidy. In the system, there are two domestic prices one of them faced by consumer and the second equals the marginal cost and the farmers determine the level of the agricultural product production of wheat.  The Saudi government uses the gap between the price the producer accepted and the consumer willing to pay to determine the production level of wheat in Saudi Arabia.
     Also, the government used the subsidy input factor to make the production of wheat as cheap and let the farmers produce more. In addition, the government made the wheat market closed. The equation is what happens for production of wheat when the Saudi government used its instruments of agricultural policy, and how that affects on saving the groundwater.
The system describes three parts. The first market is the domestic market through local supply and demand and how the instruments of agricultural policy affect on it. The second market is the input market and how the government can affect on the price of input. The third part is how government can make the wheat market closed or open. The model is found combining between good market and input market.
The model built base of a set of basic equations to describe the demands and supplies of both product and factor, describe the supply and demand of input factors and market clearing conditions.
 QUOTE          Wheat demand
 QUOTE          Supply price equals marginal cost
 QUOTE              Supply price equals the price demand plus per unit subsidy rate
 QUOTE   )        Demand Price equals world price minus import tariff.
 QUOTE          water demand
 QUOTE          other input demands
 QUOTE          water supply
 QUOTE            other input supplies
 QUOTE          Input price supply equals the input price demand plus the subsidy
 QUOTE             
 QUOTE 
 QUOTE              International market clearing condition
 QUOTE              Import equal the quota
Equation (1) describes the demand for wheat, D, which is function of price faced by consumer, QUOTE  , and other factors which leads to shift the demand curve,  QUOTE  ,which is income, and  QUOTE   which is population. Equation (2) expresses condition that supply price, QUOTE   equals the marginal cost to the farmers and determines the level of the agricultural product production, wheat. C is the total cost, which is function in the price demand of water, QUOTE  , the price demand of non water factors,  QUOTE  , and the local production, Y.  Equation (3) presents the supply price is the sum of the price demand, QUOTE  , and per unit subsidy rate, . Equation (4) expresses how price demand determines, so, world price, QUOTE  , and  is the ad valorem tariff on imported wheat. Because the ad valorem is zero in Saudi Arabia that leads to the word price,  QUOTE   equals to the demand price,   QUOTE  . Equations (5) and (6) are derived factor demand from the cost function using Shepards Lemma. Equation (5) represents water demand and equation (6) represents the non water factors demand. Equations (7) and (8) are input factor supply equations with s1 and s2 being exogenous shift variables shucks. Equation (7) explains the water supply is function on the price supply of water, QUOTE   and subsidy on producing the water, s1. Equation (8) explains the non water supply is function on the price supply, QUOTE   and subsidy, s2. Equation (9) describes the relation between price supply of factor and the price demand of factor. Equation (10) represents aggregate demand of wheat equals total local production of wheat plus import of wheat and there is no export because the Saudi government prevents export of wheat. Equation (11) shows the import equals the quota, Q.
This model has assumption, which describes the market situation and producer behaviors. These assumptions include the market is competitive, all firms are identical, constant returns to scale and the producers produce a single and homogenous output. Also, the producers minimize the cost.
Next, the system has to total differentiating these equations and converting them to elasticities. The elasticities yield a system of linear elasticities model. The system consists of several parameters values like elasticities, input cost shares, and elasticities of input substitution. The model follows the tradition of Muth (1964), Gardner (1978), Piggott (1992), and this model inspired of Salhofer and Sinabell (1999), Rickard and
Sumner (2008).
So, the total differentiating the wheat demand yields QUOTE  , then dividing both sides by the quantity demand, D, and multiplying the right hand side of the equation by   QUOTE     the first term,  QUOTE    by the second term and,  QUOTE   by the third term. After that, by ordering the right hands side and reducing form of the equation to get QUOTE  .
We impose identities on the system and then we take the total differentials express the results in relative change and elasticities.
 QUOTE 
 QUOTE 
  QUOTE 
  QUOTE 
 QUOTE 
 QUOTE 
 QUOTE 
 QUOTE 
 QUOTE 
 QUOTE 
 QUOTE 
 QUOTE       QUOTE 
 QUOTE 
Where E indicates relative change  QUOTE  , ( is the own price elasticity of demand for wheat,  QUOTE   is the income elasticity,  QUOTE  is the population elasticity,  QUOTE   is the share of total wheat growing costs for input QUOTE  ,  QUOTE   is Allen elasticity of input substitution between two inputs.  QUOTE   is the own price elasticity of supply of input  QUOTE  . In addition, Piggott (1995) noted the equilibrium displacement model be more clear with four assumptions, which are (1) elasticities of endogenous are known and constant, (2), elasticities with respect to exogenous variables are known and constant, (3) technology of production is known and constant, (4) Displacements are restricted to be in the neighborhood of equilibrium.
Then, these structural equations can be rearranged so that endogenous variables are a function of exogenous variables
  QUOTE 
 QUOTE 
 QUOTE 
 QUOTE 
 QUOTE                                  QUOTE 
 QUOTE                                  QUOTE 
 QUOTE 
 Arrange equations (23) to (29) in matrix form  QUOTE   where A is a matrix of the demand for wheat, demand of input and supply of input elasticities.  QUOTE   is a matrix endogenous variable,  QUOTE   is a matrix of elasticities or coefficient of shifter variables, and X is a matrix of exogenous variables.

(z1(z20000EZ100- 2000EZ2000000E000000EQ000010ES1000001ES2000200
1(00000ED010-(1-(200EPd00-1(2- (210EY00-1- 1101EWD1000- 1010EWD20000- 201EX110-10000EX2
This system can be solved by moving matrix A to the other side where matrixes B and X are there. The solution will be as  QUOTE  , and we can indicate matrix  QUOTE   equals, thus, the system be QUOTE  .

Chapter Four
 Equilibrium Displacement Model needs different parameters and at least each parameter needs a study to estimate it. This chapter shows the parameters the models need them and views these parameters through previous studies in the part one.  The second part shows the plan we used to do the study.
Data and Parameters Requirements

The EDM has some characteristics, which they made it as a good tool in agriculture economy. According to Piggott (1992), the EDM is relevant in cases where sufficient data for econometric modeling may be unavailable, data are unreliable or where data and extensive prior research results and experience are available to develop large-scale models of complex relationships. By looking to previous studies to get the parameters which the model needs and estimating some of parameters by using knowns, which we got them of previous studies, we can estimate.
   
In this model, we are looking on several parameters which each of them we can get it in as research or we can estimate it. Through this model we need to get the elasticities,(, (z1, (z2, and the share cost of the input factors, (i, which we find them in previous studies. Allen elasticity of input substitution and the price elasticity of input supply will be calculated by using some knowns and will be calculated rest of parameters i and i through the secondary data.
Price elasticity of wheat (()
   
The price elasticity of demand measures responsiveness of quantity of demand to a change in price with all other factors being constant. The price elasticity on goods could be elastic or inelastic.
   
Kahtani and Schreiner (1995) studies six groups of food and they said the food commodity inelastic while nonfood commodity is elastic in Saudi Arabia. Kahtani and Schreiner in 1995 estimated the price elasticity of cereals which include the wheat and it was -0.368.
Al-Sultan (2002) estimated local demand elasticity for eight groups of agriculture products in Saudi Arabia by using local supply elasticity and one of these groups contains maize, corn, rice, and wheat. Al-Sultan estimated the elasticities under three scenarios. The price elasticity for this group has a range between -0.078 to -0.099 under scenarios which has no restriction imposed of Saudi Arabia agriculture products. The price elasticity with restriction has a range between -0.162 to -0.187. So, the price elasticity of commodity of food is inelastic and realized the wheat is inelastic.

Al-Hamodi (1979) estimated price elasticity of wheat and he finds the elasticity is           0.149 and it is significant at 1 percent. In addition, Battal (1992) estimated the price elasticity of wheat by -0.7, which means when the price of wheat increases by 1, it leads to the quantity demanded of wheat reduced by 0.7 .
So, price elasticity of demand for wheat in Saudi Arabia is inelastic and it in range between -0.078 to -0.7. This study will assume the price elasticity of wheat is inelastic and it equals -0.39. The study is going to assume the price elasticity of wheat is -0.39 as average of the range.  
Income elasticity ((z1)
   
To measure how increasing or decreasing income affects on good demand, economist uses the income elasticity. The income elasticity measures how sensitive demand of a good is to change in consumers income. Through income elasticity, economist can define if these goods are normal or inferior and classify goods to luxuries or necessities. To classify good to normal or inferior, the singe of the income elasticity takes positive or negative, and to classify goods to luxuries or necessities, the value of the income elasticity takes grated than one or less.
   
Kahtani and Schreiner (1995) estimated the income elasticities for six groups and the result for income elasticity for cereals is significant at 10 percent and it is 0.033.  Al-Sultan (2002) estimated the income elasticity for the eight groups and the result reflects the group commodity, which contains maize, corn, rice, and wheat as normal goods and necessity. Al-Hamodi (1979) estimated the income elasticity of wheat per capita and it was 1.140 but it was not significant.
   
With this, paper going to assume wheat as normal good and necessity and has income elasticity equals 0.033.
Population elasticity ((z2)
  
 A change in population leads to shift the demand of goods. So, the population elasticity measures by how much percentage the demand of the good when the population changes by a percent. Battal (1992) used the population a variable to estimate wheat demand and measures the population elasticity by 2.5. The population elasticity represents increasing the population by 10 leads to increase in the consumption of wheat by 25. So, this study is going to use Battal population elasticity.
Share cost of the input factors ((i)
   
Input cost shares for a competitive industry are calculated as
(35)                                            (i  Xi WiQP
Where (i is the share cost of the input, Xi is the demand on input, Wi is the price of input, Q is production quantity of output, and P is the price of output (Mullen elt, 1989).
   
The share cost of water in wheat production is estimated by 0.18 according to Al-Attar and Al-Dossary (1957). In 1977, Ministry of Agriculture and Water estimated the share cost of water by 0.16.  Al-Nashwan (1988) estimated the share cost of water by 0.164. On another hand, California Water plan (1998) estimated the share cost of water for wheat by 0.14. As a result of the previous studies, there is some difference between them to determine the share cost of water, and the study is going to adopt the California Water plan because it is the newest reverence and it is close to the old study which estimated the share cost for specific good, which is wheat project at Saudi Arabia.

Elasticity of supply input (i)
The price elasticity of supply measures responsiveness of quantity of supplied to a change in price with all other factors constant. The price elasticity on goods could be elastic or inelastic. There are a lot of studies that estimated the elasticity of food commodities demand and input factors demand for developing and developed counties. But studies on the supply elasticity of input factors are scarce (Salhofer, 1999).
There are scarce empirical studies that estimate the supply elasticity of water factors and maybe there are no empirical studies in the Middle East countries. Wheeler et al (2008) estimated the elasticities of demand and supply for water allocation for one region along the Murray River in Australia for specific period (1997  2007). They found the overall price elasticity of supply for water allocation ranged from 0.89 to 1.79. So, this study estimated the supply elasticity for a region and for surface water, but the study look for elasticity supply for groundwater.

In the other said, there are a lot of empirical studies that estimated the price elasticity of irrigation water demand. Scheierling et al (2004) investigates variation in empirical estimates of the price elasticity of irrigation water demand and they reviewed approximately 40 studies published from 1963 to 2003. Scheierling et al found the irrigation water demand elasticities has ranged from -0.002 to -1.97 with mean of -0.51 and median of -0.22. In addition Kumar (2004) estimates the water price elasticity of demand in India and he finds the elasticity is high -0.902.

Also, these empirical studies estimate the price elasticity demand of groundwater such as Ogg  Gollehon (1989). Ogg  Gollehon (1989) estimated the irrigation groundwater demand elasticity and it has ranged from -0.22 to -0.34 for different regions. Nieswiadomy (1985) estimated the price elasticity demand for groundwater when energy is relatively cheap in 1973 and he finds it equals -0.29. While he estimated it in 1980 when energy is relatively expensive, he finds the elasticity rises to 1.24. Also, Salman et al (2004) estimated the price elasticity of groundwater demand in Jordon and finds the price elasticity of groundwater demand in the case of safe extraction rate is -0.866, but the elasticity with actual situation is -1.275. . Also, they found the price elasticity of groundwater demand became inelastic when the water supply decreased and the elasticities have ranged from -0.31 to -0.73.

So, based on these studies, it will be assumed that the groundwater supply has the same elasticities of demand. The assumption for supply elasticity for groundwater,1, is inelastic as  most studies result and the value of supply elasticity be 0.3 because the price of energy is cheap and will assume the supply of groundwater is decreased.

In another hand, according to Salhofer (1999),   a reasonable range of 2 is between 1 and 3 , and that because Salhofer (1997) drives the price supply elasticities for farm labor of 3.19, for operating inputs of 1.16, and for durable investment  goods of 0.96. Also, because Salhofer (1998) drives the price supply elasticities for farm labor of 1.2, for operating inputs of 1.91, and for durable investment goods of 1.46. Consequently, there is assumption for supply elasticity for non water factors is 2.

Elasticity of substitution (ij)
Elasticity of substitution is a measure of the proportionate change in ratio of inputs, capita to labor ratio as example relative to the proportionate change in marginal rate technical substitute along an isoquant. In other words, the elasticity of substitution measures how easy it is to input for another while keeping the level of output constant.

Nieswiadomy (1988) estimates Allen partial elasticities of substitution for five inputs (ater, labor, center pivot, furrow, and wheel roll system) and Nieswiadomy finds the elasticity substitution between labor and water is 3.54 and the elasticity substitution between the furrow system and water 2.42. Also, Kumar (2004) estimated the substitutability between four inputs which are water, labor, capital, and material for several industries and estimated the Allen elasticity of substitution and Morishiam elasticity of substitution. The Allen elasticity of substitution between water and Capital is -1.848 while Morishiam elasticity of substitution between water and Capital is 0.893. So, that means, the Allen elasticity of substitution represents the relationship between water and capital is complement while Morishiam elasticity of substitution represents it as substitutes.

On another hand, most studies which used EDM in agriculture industries studies assumed the value of 0.1 for elasticity of substitution between input and other inputs (Mounter, Piggott and Mulle, 2005). Consequently, an input substitution elasticity of 0.1 has been assumed between water factor and non water factors.

Share of aggregate demand ()
    Most Aggregate demand of agriculture commodities in Saudi Arabia combines of domestic production and import, but in some agriculture commodities, Saudi Arabia reached to self-sufficiency such as wheat (Al-Sultan 2002). Since 1984, Saudi Arabia reached self-sufficiency of wheat and aggregate demand of it provided by local production. In 2008, the Saudi Arabian ministry of agriculture has decided to reduce wheat production by 12.5 percent annually beginning with 2009.
So, in this paper we are going to assume there are two situations, first the wheat market in Saudi Arabia is close and that was before 2009 and the aggregate demand provided by local production and 1 equals one. The second situation, wheat market in Saudi Arabia is open and the government reduces the local wheat production by 12.5 percent annually. So, 1 and 2 will change year by year.