ECONOMIC SURPLUS MODEL: A Tool for Ex-Ante Impact Assessment

JAIPRAKASH BISEN (10562)Ph.D. Ist Year

Division of Agricultural EconomicsIndian Agricultural Research Institute, Pusa

New Delhi-110012

Speaker

Scheme of Presentation

1) Concept of Impact and Impact Assessment2) Basic Questions on Impact Assessment3) Economic Approaches to Impact Assessment4) Economic Surplus Model (ESM)-

a) Introductionb) Basic Assumptions of ESMc) Model Specificationd) Reasons for Popularity of ESM

5) Practical Aspects of Using the ESM-a) Type of Data Requiredb) How to Use the Model / How to Calculate Economic Surplus

6) Merits of Economic Surplus Model7) Limitations of Economic Surplus Model8) Improvements Over ESM9) Scope of Using ESM10) Case Studies

Concept of Impact & Impact assessment

Impact Assessment is the process of identifying the future consequences of a current or proposed action.

The “impact” is the difference between what would happen with the action and what would happen without it.

Adopted from- Ruth Simsa et.al., 2014

OUTCOME IMPACTINPUT ACTIVITIES OUTPUTS

Results that are measurable(Tangible)

Results that are not measurable

(Intangible)

Outcome with intervention -

Outcome without

intervention

Fig: The Impact Value Chain, Adopted from- The Goldman Sach Foundation, 2003

• Why to do Impact Assessment? (Reason)Feasibility study; Beneficiary; Change in variable- Poverty, Education, Employment, Environmental quality, Income, Prices, Living Standard etc.

• When to do Impact Assessment?Before ( Ex- Ante) and After ( Ex-Post )

• Approaches in Impact Assessment? Before and After (But it needs the benchmark information and sometimes the benefits may be exaggerated)With and Without (Can be used only when the two comparing

units are homogenous)• What to Measure in Impact? (Indicators)

Efficiency, Food security, Sustainability, Employment generation, Institutional capacity, Net Benefits etc.

• Level of Impact Assessment?Farm; Household; Regional; National; Global level

Basic Questions on Impact Assessment

Impact Indicators FARM Level

Increase in average yield Increase in net income Decline in unit cost of production Enhance employment and labor productivity Price premium due to quality Increase of improved seed demand Household food & nutritional security Gender related issues

REGIONAL Level

Food production Sustainability of natural resources Food security Employment issues Equity issues Poverty Trade Inter- sectoral linkages

Production Prices Trade:

Export Import

Spill-over effect Sustainability of natural resources

NATIONAL Level

Note: it’s not the exhaustive list of indicators. They may vary as per objectives of research

Source- Kumar P., Slideshare. netAccessed on -07/07/2016

Types of Impact Assessment

Before the project or program is initiated

Aid in priority setting

Expected values

Perspective

After adoption of a research product

Tangible and intangible outcomes after its successful

implementation

Actual Values

Retrospective

Ex-A

nte

Ex-Post

Significance of Impact Assessment.

It identifies the under and over represented functions and factors of the policies and structures.

It acts as the supporting pillar in the development of policies and structures.

Applicable, acceptable and equally useful in all the field of life.

Helps in improving the performance of the procedure or product.

Enlightens the environmental, health social and economics consequences of the application under process.

Provides assured structure and reduces the risk of practical performance.

Enlightens the logical and conceptual objectives.

Provides testimonials for the fundamentals of policies.

Improves and assess the quality of the policy, product or a procedure.

Considered a the integrated approach which analyze both the disadvantages and advantages

Provides confidence to the new initiatives in the society.

Also help the organization in evaluating the cost and maintenance of the policies or structures.

Continue…

Economic Approaches to Impact Assessment

1) Econometric Approach- The econometric approach employs a production function, cost function, or a total factor productivity analysis to estimate the change in productivity due to investment in research.

It also uses regression models (like probit, logit, tobit, and two-stage least squares (2SLS) regressions) to explain the impact of investment on socio-economic and agro-ecosystem services.• The main constraint on the wider application of econometric approaches in

developing countries is data availability (good-quality time-series data) and quality.

• Alternative to time series data- Panel Data (Cassman and Pingali,1995; Pender, 2005)

2) Project Approach- It uses the tools like Benefit-Cost Ratio, Net Present Worth of project, Internal Rate of Returns, Sensitivity Analysis etc. to assess the project impact. But, its purely Economic and overlooks the social impact.

3) Economic Surplus Approach- Most popular and fruitful approach used to assess the consequences of investments in agricultural research (Griliches,1958)

4) Bio-Economic Model- Its the integration of biophysical and economic information into a single integrated model which is capable of simultaneously addressing various dimensions of agriculture and NRM technology changes and the resulting trade-offs among economic, sustainability and environmental objectives. (Barbier, 1998; Barbier and Bergerson, 2001; Holden and Shiferaw, 2004;Holden et.al. 2004)

5) Meta Analysis- is effectively an analysis of analyses. It is a relatively new methodology and its main purpose is to collate research findings from the previous studies, and distil them for broad conclusions. Meta-analysis is helpful to policymakers, who may be confronted by numerous

conflicting conclusions

6) Programming Methods- try to identify one or more optimal technologies or research activities from a set of options. Thus, these methods try to maximize one objective, i.e. farmers’ profit subjected to constraints like availability of land, labour and other inputs.

APPROACHES MAJOR ADVANTAGE MAJOR LIMITATIONS

Econometric Approach All sectors are included Non- availability of time series data

Project Approach Give precise results and are quick to estimate

Only Economic impact are measured., Sensitive to discount rate and no of years of project

Economic Surplus Approach

All sectors are included & it needs less information than the other methods

Elasticity of demand & Elasticity of supply sensitive

Bio-Economic Model Whole system is included, Optimization

Meta Analysis Provides a macro picture Aggregation bias

Adopted from- K. Palanisami et.al, 2011

Concept of Economic SurplusPR

ICE

QUANTITY

P

D

S

S

D

e

OQ

Consumer’s Surplus

Producer’s Surplus

Economic Surplus

Economic surplus represents the difference between the monetary value of the units consumed and the monetary value of units produced up to the equilibrium price and quantity.

• ESM, based on some of the tools of welfare economics look at how the interaction of demand and supply determine the value of economic transaction.

• ESM shows how the research affect the supply and demand and their resultant market outcomes.

• By augmenting product quality that increase the product demand, or lowering the cost of production that increase the supply, research can expand the market and change the economic rewards for market participants.

Assumptions of Economic Surplus Model

1) A parallel shift of the supply curve following the adoption of technology/ Investment,

2) The functional form of the supply curve is unknown3) Assumption of closed economy4) Country is the only exporter of product and rest of world do not

adopt the technology (In case of Open Economy)5) The competitive demand price for a given unit measures the value

of that unit to the consumer.6) The competitive supply price for a given unit measures the value of

that unit to the producer.7) The costs and benefits accruing to each member of the relevant

group should be added.

Harberger ,1971 and Alston, 1995

Model SpecificationFor a Closed Economy with a parallel supply shift that results from an improved technology, the annual change in market‐level total economic surplus (∆TS) can be measured as:

  

Where P0  = Base price of the commodity, Q0 = Base quantity, ɳ = Absolute value of the price elasticity of demand.  Z = K ε/( ε+ɳ) or the proportionate price reduction in the market, where ε is the 

elasticity of supply Kt =  proportionate reduction in cost per ton of production in time t or research induced shift in

supply and it can be calculated as      Where E(Y) = Proportionate yield increase per hectare for technology adopters, ɛ = Price elasticity of supply, E(C) =  Proportionate variable input cost change per hectare, A = Proportion  of the area affected by the technology, d = Depreciation rate of the technology

(Alston, et al., 1995).Pr

ice

P0

P1

Q0 Q1

a

bK

S0

S1

Quantity

D

∆TS = P0Q0K(1+0.5Zɳ)

  Kt = ((E(Y)/ε) ‐ (E(C)/(1+E(Y) )At(1‐d)t

∆PS = P0Q0 (K-Z) (1+0.5Zɳ)∆CS = P0Q0Z(1+0.5Zɳ)

For a Open Economy with parallel supply shift-  

      Where PW = World priceQ0 = Base quantityK =  proportionate reduction in cost per ton of productionɛ = Price elasticity of supply

Model Specification

Pric

e

P0

P1

Q0 Q1

a

bk

S0

S1

c

Quantity

D

For a Closed Economy with a Proportional supply shift

∆TS = 0.5P0Q0K(1+0.5Zɳ)

 ∆TS = PWQ0K(1+0.5K ε)

Economic Surplus Model is Quite Popular

1

2

3

4

Requires the least data

Is relatively easier to use

Is relatively simple and flexible

Yields reliable results

Practical Aspects of Using ESM

In General Price

Quantity0

S0

S1

D

P0

P1

ab

cdI 0

I1

Q0 Q1

Δ TS = +Δ CS = + Δ PS = -

Variant- 1 Variant- 2 Technological innovation

leads to COST REDUCTION Technological innovation

leads to INCREASE IN SUPPLY

PRIC

E

QUANTITY

P0

D

S0

D

e0

O Q

P1 S1

e1

PRIC

E

QUANTITY

P0

D S1

De0

O Q0

e1

S0

Q1

Change in Economic Surplus = P0e0e1P1 Change in Economic Surplus = Q0e0e1Q1

Continue…

Continue…

PRIC

E

QUANTITY

P0

S0

D

e

O Q1

S1

Q0

P1 e’

PRIC

E

QUANTITY

P0

S0

D

e

O Q1

S1

Q0

P1 e’

PRIC

E

QUANTITY

P0

S0

D

e

O Q1

S1

Q0

P1 e’

Elasticities and distribution of benefits

Case-I Case-IIICase-II

Es = Ed Es > EdEs < Ed

∆ CS = ∆ PS ∆ CS > ∆ PS∆ CS < ∆ PS

The elasticity of supply and demand have little influence in determination of economic surplus when compared to other variables, i.e. price, productivity, quantity etc.

-Masters et al. (1996)

Cost of Research/Developing a Technology

• Why it is required to estimate the research cost?

Continue…

I. Several costs are involved in the generation of research and technologies, &II. To analyse the research’s viability is necessary to estimate the research costs.

• What costs to be considered?

The operation costs-Fuel, energy, laboratory, field products and other inputs (Same for

capital assets also) Other Costs-The administrative expenses, costs of complementary services as libraries and the costs of technology transfer like extension programmes.

- (Masters et al., 1996)

Wages of the team employed as well as time devoted to generate a technology -(Pardey et al., 2002)

a) Productivity increase generated by research,b) Equilibrium price of assessed product,c) Adoption rate and costs,d) Timeframe between research and adoption, and e) Price elasticity of supply and demand.

To calculate the magnitude of change of the supply curve as a result of the adoption of technological innovations

(Maredia et al., 2000).

Data Required for using ESM

Computation of ES Using Spreadsheet

Hypothetical Example.xlsx

Merits of Economic Surplus Model

Estimated the distribution of benefits across the stakeholders.

It gives the gross benefit from a research or technological development

It can be used for ex-ante as well as ex-post impact assessment.

- (Nderim Rudi, 2008)

It is easy and simple to use.

It requires relatively lesser data than other approaches and gives reliable results.

Limitations of Economic Surplus Model

It generally ignores the transaction cost which results in the overestimation of benefits,

Partial equilibrium nature of analysis ignores the effect of any relationship with other product and factor in the market

Issue of measurement error is associated in Economic Surplus Analysis.

It gives only the gross benefit of any intervention and ignores the net benefit.

Improvement over Economic Surplus Model

Equivalent Variation (EV) - It takes into account the income effect of the price change.

Econometric Approach - Gives most reliable results

Tools for Computation of Economic Surplus

S. No. Tools Developed By01. MODEXC International Centre for Tropical Agriculture

(CIAT)

02. RE4 Australian Centre for International Agricultural Research (ACIAR)

03. DynamicResearch Evaluation for Management (DREAM)

International Food Policy Research Institute (IFPRI)

04. Spreadsheet Approach -------------------------------------

Scopes of Using Economic Surplus Model

Ex- Ante Impact Assessment

Feasibility of a research proposal/project; policy

Ex-post Impact Assessment

Economic benefit of policy intervention

Welfare measurement form introduction of new technology

In Agriculture-• Varietal Impact• Impact of adoption of new technology• Impact of research and extension interventions, etc.

Case Study- 1 ( Ex-Ante Impact Assessment)

ITEMS PARTICULARSYear of Publication 2011Area All over India ( Eastern, Western, Northern, & Southern

regions)Year of Study 2009Production Share of Brinjal in Vegetables

8% (Fourth largest after Potato, Onion, & Tomato)

Major Problem Fruit & Shoot Borer (60-70% Yield losses)

Adoption Level 15% 30% 60%

Methodology Followed in Impact Analysis

Economic Surplus Model (Open Economy)

Potential Technological Intervention

Bt. Brinjal

REDUCTION IN INSECTICIDE USE AND INCREASE IN FRUIT YIELD DUE TO Bt BRINJAL HYBRIDS

Results

POTENTIAL ECONOMIC BENEFITS OF Bt BRINJAL CULTIVATION TO FARMERS AND CONSUMERS UNDER DIFFERENT ADOPTION SCENARIOS

AT ALL-INDIA LEVEL

SIMULATED GAINS IN ANNUAL ECONOMIC SURPLUS FROM Bt BRINJAL CULTIVATION UNDER DIFFERENT SCENARIOS AT

ALL-INDIA LEVEL

Results

Case Study- 2 ( Ex-Post Impact Assessment)

ITEMS PARTICULARSYear of Publication 2012Area Anantapur, AP

(Drought prone district)Year of Study 2006-08Area Under groundnut 819 thousand Ha. (75% of GCA of district) & 15% of GN area

of CountryRainfall Scenario Deficit rainfall by 35% in June, July % Aug, and 31% deficit in

SeptemberGroundnut Growing Season

Kharif (July-September)

Rulling Variety TMV 2 (1970- 2005)Technological Intervention

ICGV9114 (2002-03)

ITEMS PARTICULARSNo. of Respondents 400 (200+200)Village Covered 49 (out of 68)

Mandal Covered 8Method of data Collection

Simple Random Sampling

Duration of data collection

Five years after introduction of ICGV 91114

Methodology Followed in Impact Analysis

Economic Surplus Model (Open Economy)

RESULTVariety TMV 2 ICGV91114Yield 567 kg/ha 704 kg/ha

Total Revenue 17398 22060

Total Cost 7898 9235Net Benefits 9500 12825

NET PRESENT VALUE OF THE BENEFITS FROM ADOPTION OF IMPROVED DROUGHT-TOLERANT GROUNDNUT VARIETY ICGV

91114 FOR THE PERIOD 2004-05 TO 2020-21

Results

Thank You For Pleasant Listening