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- 1. Welfare: Consumer and Producer Surplus and Internal Rate of Return Daniel Mason-D’Croz Sherman Robinson
- 2. Welfare Analysis • We need to compute benefits and costs associated with policy choices – Benefits and costs occur over long time periods • “Discounting” to compute present value of a time stream of benefits and costs • “Social” versus “market” benefits and costs – Externalities and non-market costs and benefits – We will focus on direct and indirect, measurable, costs and benefits
- 3. Benefits: Consumer Surplus • Measurable gains to demanders from changes in supplies of goods due to projects – Idea of “Consumer Surplus” (CS): the total amount demanders would be willing to pay for a given amount of commodities • Changes in CS across all markets affected by a “project” measure the benefits attributable to that project – Direct and indirect effects
- 4. Benefits: Producer Surplus • Producer surplus measures the net benefits to producers from a “project”: the change in total revenue minus the change in total costs of production of all producers – Direct and indirect effects • The sum of changes in Consumer and Producer Surplus measures the total benefits arising from a project
- 5. Costs • Total costs associated with a project include both the direct costs of the “project” (e.g., developing a new seed variety) and the indirect impact on costs of linked producers – We will measure only the “direct” financial costs associated with a project – Changes in costs of linked sectors will be captured by changes in producer surplus, which are measured from the net benefit side.
- 6. Consumer Surplus PC QF Pref Psimulation PIntref PIntsimulation Qref Q* Qsimulation Reference Consumer Surplus Simulation Consumer Surplus Income Effect Price Effect Both Income and Price Effect (gains from income changes lost to price changes)
- 7. “Virtual” Supply Curves • Need to generate a “virtual” supply curve, given yield and land area equations – “Virtual” because it is not generated from a fully specified cost function • Yield and area are both functions of producer prices, with constant elasticities – Supply elasticity is the sum of these two elasticities – Constant is the product of the two constants
- 8. Producer Surplus PP QS Psimulation Qsimulation Agricultural Revenue Producer Surplus Total Cost
- 9. Producer Surplus • We need to find the area under a non-linear, constant-elasticity supply curve. • After some algebra, that area is equal to: • Which is equal to total revenue times 1 over 1 + the elasticity of supply. 𝑃𝑆 = 𝑃 × 𝑄𝑆 = 𝑃 × 𝑄𝑆 1 + 𝜀
- 10. Benefit-Cost Analysis • Can use CS and PS to measure benefits of introducing some change such as a new technology • Need to discount CS and PS over time and compute net present value (NPV) of benefits • Need cost data over time to compute NPV of costs
- 11. Net Present Values 𝑁𝑃𝑉 𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 = 𝑡=1 𝑇 ∆𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑡 1 + 𝑟 𝑡 𝑁𝑃𝑉 𝑃𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 = 𝑡=1 𝑡 ∆𝑃𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑡 1 + 𝑟 𝑡
- 12. Net Present Values 𝑁𝑃𝑉 𝑇𝑜𝑡𝑎𝑙 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 = 𝑁𝑃𝑉 𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 + 𝑁𝑃𝑉 𝑃𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑁𝑃𝑉(𝐶𝑜𝑠𝑡 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛) = 𝑡=1 𝑇 𝐶𝑜𝑠𝑡 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑡 1 + 𝑟 𝑡
- 13. Benefit-Cost and Internal Rate of Return 𝑁𝑃𝑉(𝑇𝑜𝑡𝑎𝑙 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛) 𝑁𝑃𝑉(𝐶𝑜𝑠𝑡 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛) 𝑁𝑃𝑉 = 𝑡=1 𝑇 (∆𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑡 + ∆𝐴𝑅 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑡 ) − 𝐶𝑜𝑠𝑡 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑡 1 + 𝑖𝑟𝑟 𝑡 = 0
- 14. Internal Rate of Return • IRR calculation is done by using the GAMS solver to find a solution to the equation • If NPV of costs exceeds NPV of benefits, the IRR does not exist – We check for this condition and do not try to solve for the IRR in this case
- 15. Technology Adoption and Costs • Technology Adoption Pathway Module – Pre-processing module the creates data to be read in by IMPACT food module – Allows users to specify regions, and timing for technology adoption • Critical to test several adoption scenarios, to inform ex-ante analysis of different technologies
- 16. Technology Adoption and Costs • Costs are currently exogenous and supplied by the users • Technology adoption costs comes in 3 forms: – Global Costs: Not tied to a specific country (e.g. CG- center investments) – National R&D Costs: Costs incurred at the country level to develop and implement a technology (e.g. National Research centers) – Extension Costs: Costs incurred at country level to implement a technology in the field • Multiple cost scenarios should be used to test cost sensitivity in the benefit-cost analysis