Impact of government funding for agricultural R&D on welfare S S’ Effect of R&D investments on Supply curve Q P P’

Case 1 : general case – Closed economy a de b f c g P P’ QQ’ Observed changes 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 Conclusion: Change in farmer surplus is > 0 only if e+g > a D S S’

Case 2 : Inelastic demand and elastic supply Closed economy a e b c d f P P’ QQ’ D S S’ R&D impact on surplus 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. g 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 a e bc d f P P’ QQ’ D S S’ 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. g 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 D QQ’ Pw h i j R&D impact on surplus 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. S S’ Sw

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