Spatial allocation and the shadow pricing of product characteristics

The paper considers an industry transforming primary commodities (farm products) into processed commodities (food products). It focuses on the allocation of embedded characteristics (carbohydrate, protein, etc.) both across space and among commodities. The approach generates a spatial competitive market equilibrium of production, consumption, transformation, and trade for both primary and processed commodities, along with the spatial distribution of shadow prices for the product characteristics. The model provides a basis for analyzing the allocation and pricing of agricultural products, food products, and characteristics in spatial markets. The empirical usefulness of the model is illustrated in the context of regional resource allocation in the U.S. dairy sector.