The Effect of Organic Rice Consumption on households’ welfare in Shiraz: Willingness to Pay Price Premium

Introduction The growing people's awareness about the impact of food consumption on human health has led to serious consideration for the production and consumption of organic products, including rice in many countries. Rice is the second most used cereal after wheat in Iran where chemical fertilizers and pesticides are used for crop productions such as rice. Due to the lack of chemicals used in organic rice production, its consumption can be effective in reducing diseases and promoting community health. The global organic rice market that was valued at US$ 1,120 million in 2017 expected to reach US$ 1,390 million by the end of 2025, growing at a compound annual growth rate of 2.8 percent. Despite its vital role, there is no official market for organic rice in the country and to best of our knowledge; little researches have been done in this area so far. This study aims to estimate willingness to pay for organic rice, using contingent valuation method based on open-ended questions in Shiraz city, and to evaluate indirectly possible changes in households' well-being in Shiraz by switching towards organic rice. Methodology Since consumers' willingness to pay as the dependent variable consists of zero and positive values, the Tobit model was utilized as the first step of this study. However, the Tobit model relies crucially on normality and homoscedasticity assumptions. If the error term is either heteroskedastic or nonnormal, the MLE is inconsistent. Therefore, in this study, after estimating the Tobit model, the hypotheses of homoskedasticity and normality of the residuals were tested and the results showed that these hypotheses are rejected. The Tobit regression makes a strong assumption that the same probability mechanism generates both the zero and the positives values. Heckman two-step model allows for the possibility that such values are generated by different mechanism. Also, this model allows for dependence in the two parts of the model. The Heckman two-step model comprises a selection (participation) equation and an outcome (WTP) equation. In the first step of the Heckman two-stage procedure, a Probit model was estimated and based on the results, the inverse Mills ratio was calculated. In the second step, an ordinary least squares regression for the positive values of the dependent variable (consumer' willingness to pay for organic chicken meat) was estimated including the inverse Mills ratio as one of the explanatory variables. Results and Discussions The results of Probit model showed that the effects of gender and household size on the selection of organic rice by consumers are significant. Accordingly, women are more likely to buy organic rice than men and as household size decreases the probability of buying organic rice increases. But estimation of Heckman second stage showed that the effects of these variables on the price premium for organic rice are not significant. In other words, although women and families with low populations are more likely to choose organic rice, they are not willing to pay extra for organic rice. The results showed that education level has a positive and significant effect on both the selection and the willingness to pay for organic rice. Thus, the probability of organic rice being selected by the head of households with a college degree is 61% higher than that of uneducated households. The consumers' willingness to pay with a college degree is about 39 % more than others. Household income is one of the most important variables influencing the choice and willingness to pay a premium for organic rice. The effect of this variable on consumers' selection and willingness to pay for this product is positive and significant. According to the results, the probability of choosing organic rice by high-income households is 73% higher than low-income ones and their willingness to pay is 32% more.