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Welfare:
Consumer and Producer Surplus
and Internal Rate of Return
Daniel Mason-D’Croz
Sherman Robinson
Welfare Analysis
• We need to compute benefits and costs
associated with policy choices
– Benefits and costs occur over lo...
Benefits: Consumer Surplus
• Measurable gains to demanders from changes
in supplies of goods due to projects
– Idea of “Co...
Benefits: Producer Surplus
• Producer surplus measures the net benefits to
producers from a “project”: the change in
total...
Costs
• Total costs associated with a project include
both the direct costs of the “project” (e.g.,
developing a new seed ...
Consumer Surplus
PC
QF
Pref
Psimulation
PIntref
PIntsimulation
Qref Q*
Qsimulation
Reference Consumer Surplus
Simulation C...
“Virtual” Supply Curves
• Need to generate a “virtual” supply curve, given
yield and land area equations
– “Virtual” becau...
Producer Surplus
PP
QS
Psimulation
Qsimulation
Agricultural Revenue
Producer Surplus
Total Cost
Producer Surplus
• We need to find the area under a non-linear,
constant-elasticity supply curve.
• After some algebra, th...
Benefit-Cost Analysis
• Can use CS and PS to measure benefits of
introducing some change such as a new
technology
• Need t...
Net Present Values
𝑁𝑃𝑉 𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 =
𝑡=1
𝑇
∆𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛
𝑡
1 + 𝑟 𝑡
𝑁𝑃𝑉 𝑃𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 =
𝑡=1
𝑡
∆𝑃𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛
𝑡
1 + 𝑟 𝑡
Net Present Values
𝑁𝑃𝑉 𝑇𝑜𝑡𝑎𝑙 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 =
𝑁𝑃𝑉 𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 + 𝑁𝑃𝑉 𝑃𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛
𝑁𝑃𝑉(𝐶𝑜𝑠𝑡 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛) =
𝑡=1
𝑇
𝐶𝑜𝑠𝑡 𝑠𝑖...
Benefit-Cost and Internal Rate of
Return
𝑁𝑃𝑉(𝑇𝑜𝑡𝑎𝑙 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛)
𝑁𝑃𝑉(𝐶𝑜𝑠𝑡 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛)
𝑁𝑃𝑉
=
𝑡=1
𝑇
(∆𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛
𝑡
+...
Internal Rate of Return
• IRR calculation is done by using the GAMS
solver to find a solution to the equation
• If NPV of ...
Technology Adoption and Costs
• Technology Adoption Pathway Module
– Pre-processing module the creates data to be read
in ...
Technology Adoption and Costs
• Costs are currently exogenous and supplied by
the users
• Technology adoption costs comes ...
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Core Training Presentations- 7 Welfare, Benefit-Cost Analysis

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Global Futures & Strategic Foresight (GFSF) program enhances and uses a coordinated suite of biophysical and socioeconomic models to assess potential returns to investments in new agricultural technologies and policies. These models include IFPRI’s International Model for Policy Analysis of Agricultural Commodities and Trade (IMPACT), hydrology and water supply-demand models, and the DSSAT suite of process-based crop models.

The program also provides tools and trainings to scientists and policy makers to undertake similar assessments.

GFSF program is a Consultative Group on International Agricultural Research (CGIAR) program led by the International Food Policy Research Institute (IFPRI)

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Core Training Presentations- 7 Welfare, Benefit-Cost Analysis

  1. 1. Welfare: Consumer and Producer Surplus and Internal Rate of Return Daniel Mason-D’Croz Sherman Robinson
  2. 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. 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. 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. 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. 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. 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. 8. Producer Surplus PP QS Psimulation Qsimulation Agricultural Revenue Producer Surplus Total Cost
  9. 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. 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. 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. 12. Net Present Values 𝑁𝑃𝑉 𝑇𝑜𝑡𝑎𝑙 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 = 𝑁𝑃𝑉 𝐶𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 + 𝑁𝑃𝑉 𝑃𝑆𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑁𝑃𝑉(𝐶𝑜𝑠𝑡 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛) = 𝑡=1 𝑇 𝐶𝑜𝑠𝑡 𝑠𝑖𝑚𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑡 1 + 𝑟 𝑡
  13. 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. 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. 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. 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

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