Climate Change and Market Failures in Subsistence Agriculture: A CGE Analysis from the South-Southeast of Mexico

This study analyzes how market failures alter the magnitude and distribution of economic effects of climate change on rural households in the South-Southeast of Mexico. To this end, we develop a Computable General Equilibrium (CGE) model that explicitly incorporates failures in the maize market. The model simulates two exogenous shocks—a reduction in maize yields and an increase in its price—and compares two counterfactual scenarios: with and without market failures. The results show that these imperfections increase the economic cost of climate change, raising the decline in regional real income from 0.76% to 2.75% and significantly modifying its distributional effects. In particular, producers with holdings of up to 2 hectares shift from a 0.57% income gain under perfectly integrated markets to a 5.45% loss when the market failure is incorporated. These findings show that assumptions about how markets function affect both estimated climate costs and the identification of vulnerable households, underscoring the importance of distributional considerations for sustainable rural development. Adaptation strategies should account for subsistence producers’ limited market participation and reliance on self-consumption rather than relying exclusively on price-based incentives. Targeted improvements in credit access, input markets, and extension services warrant evaluation as potential responses, although their effectiveness is not directly assessed by the model.