Transcript Presentation 1B

Impact of government funding for
agricultural R&D on welfare
S
Effect of R&D investments
on Supply curve
P
S’
P’
Q
Case 1 : general case – Closed economy
S
Observed changes
D
S’
P
f
a
c
b
P’
1)
Consumer surplus:
a+b+c
2)
Farmer surplus:
d+e+g-a-d = e+g-a
3)
Tax payer expenditure:
-(g+b+e+c+f)
4)
Welfare change:
-f
g
d
e
Conclusion:
Change in farmer surplus is > 0
only if e+g > a
Q
Q’
Case 2 : Inelastic demand and elastic supply
Closed economy
R&D impact on surplus
D
1.
Consumers take all the benefit of it, purchasing quite
the same quantity but at a much lower price.
Sc = a+b+c (low sensitivity of demand to drop in
prices)
2.
Impact on surplus for producers is negative since
they lose much more surplus due to the price
decrease (a) than they win thanks to a more efficient
cost structure and an increase in quantities
purchased (e+g).
e+g < a  Sp = e+g-a < 0
3.
Overall this case presents the lowest negative impact
on welfare  the (f) area tends to be minimized by
the low elasticity of demand.
S
P
f
a
b
P’
d
e
S’
c
g
Q
Q’
Conclusion:
Little negative impact on welfare.
More benefitial to comsumers than to producers.
No evident incentive for producers to improve R&D.
Case 3 : Elastic demand and inelastic supply
Closed economy
R&D impact on surplus
1.
Consumers enjoy a very little decrease in prices
but correspondingly rise strongly their quantities
purchased (high elasticity of their demand). Overall
they see their surplus slightly increase by:
Sc = a+b+c
2.
This situation is very beneficial to producers who
can keep for their own profit the improvement of
their cost structure efficiency and the rise in
quantities purchased (e+g) thanks to a very slight
decrease in prices (a).
e+g > a  Sp = e+g-a > 0
3.
Overall this case presents the highest negative
impact on welfare  the (f) area tends to be
maximized by the high elasticity of demand.
S
S’
f
P
a
P’
d
b c
g
e
D
Q
Q’
Conclusion:
Strong negative impact on welfare.
More beneficial to producers than to consumers.
High incentive for producers to increase R&D
Case 4 : Effect in an open economy
S
S’
R&D impact on surplus
Pw
h
1.
Producers thanks to a more efficient cots structure
can offer higher quantities for sale at the same
price on the international market. They become
more competitive and see their surplus increase by
(i+j)
2.
Welfare impact is the increase of the producer
surplus (i+j) to which you need to retrench the tax
payer expenditure.
Sw
i
j
D
Q
Q’
Who should fund R&D ?
• In a closed economy, the funding should be provided by:
– Consumers in the case of inelastic demand and
elastic supply when their gain in surplus is higher than
the tax payer expenditure (case 2)
– Producers in the case of elastic demand and inelastic
supply for same the reason (case 3)
• In an open economy, the funding should be provided by
producers because they are the only category taking the
benefit of R&D