Consumer and Producer Surplus and Internal Rate of Return Daniel MasonDCroz Sherman Robinson Welfare Analysis We need to compute benefits and costs associated with policy choices Benefits and costs occur over long time periods ID: 373622
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Welfare: Consumer and Producer Surplus and Internal Rate of Return
Daniel Mason-D’Croz
Sherman
RobinsonSlide2
Welfare AnalysisWe 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 benefitsSlide3
Benefits: Consumer SurplusMeasurable 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 effectsSlide4
Benefits: Producer SurplusProducer 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 Slide5
CostsTotal 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. Slide6
Demand CurvesImpact uses constant elasticity demand curves
We need the inverse demand curve to compute
c
onsumer surplus:
Cannot integrate this function since when Q=0, P=infinity. We work with a linear approximation.Slide7
Consumer SurplusSlide8
Consumer Surplus
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Decomposition of CS
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“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 constantsSlide11
Producer SurplusSlide12
Producer Surplus
Invert the supply function
Integrate to get total costSlide13
Producer Surplus
After some algebraSlide14
Producer SurplusWe 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.
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Benefit-Cost AnalysisCan 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 costsSlide16
Net Present Values
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Net Present Values
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Benefit-Cost and Internal Rate of Return
Slide19
Internal Rate of ReturnIRR 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 caseSlide20
Technology Adoption and CostsTechnology 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 technologiesSlide21
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