Welfare: Consumer and Producer Surplus and Internal Rate of Return

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

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

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.

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

12. Net Present Values

13. Benefit-Cost and Internal Rate of Return

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