Supply Shifts and the Size of Research Benefits: Reply

Abstract

The central proposition in our paper on supply shifts and research benefits was that the size of GARB is sensitive to the nature of the shift in the supply curve induced by adoption of a process innovation. We also argued that because the available formulas for calculating GARB typically presumed a particular type of shift, estimation error would result from the application of such formulas if the actual shift did not correspond to that presumed. Despite the claim by Rose that "U made a fundamental error which invalidated the bulk of their findings, " none of the arguments made in either comment have persuaded us to reject either of the above propositions. All of the comment by Wise and Fell (WF) and the first part of that by Rose relate to the calculations we carried out to numerically illustrate these propositions, and to provide some idea of their quantitative importance. The second part of the comment by Rose is a restatement of arguments contained in a paper by Mishan (1968), and in our view is a general attack on the notion of producer surplus rather than a specific criticism of our paper.While we cannot accept all of the detailed criticisms made in the comments, we do accept the main thrust of the argument by both authors that the computational procedures underlying the results in our illustrative tables were in error; and that as a result we overstated both the sensitivity of GARB to the nature of the supply shift and the magnitude of the possible error which would result from using a formula based on a particular type of shift. We also have some reservations to be outlined below about the computational procedures ad vocated by WF and by Rose, and hence about the tables of results they derive using these procedures, but would agree that either approach is to be preferred to our earlier proposals.Nevertheless, we note that the illustrative tables calculated by WF and by Rose still support our two main contentions, namely, that the size of GARB is sensitive to the type of supply shift, and that formulas which presume a particular type of shift can lead to substantial errors. According to Fell and Wise, "the exact method still shows benefit estimates varying by a factor of three, depending on the shift R. K. Lindner is a visiting research fellow, University of Sussex, and F. G. Jarrett is a professor of economics, University of Adelaide.Peter Wagstaff helped clarify the authors' thoughts on a number of points, but any errors are the authors. postulated." Similarly, it can be seen from table 1 of Rose that a formula which presumed a pivotal shift when the actual shift was convergent would underestimate GARB by a factor of two or more. Furthermore, there is no reason why the particular cases of a pivotal and convergent shift which we chose originally for illustrative convenience should be treated as limiting cases. It is by no means inconceivable that particular innovations might only affect marginal output, and have no effect at all on the cost of producing the bulk of intramarginal output. In such a case, th...

Social Costs of Regulation of Primary Industry: An Application to Animal Welfare Regulation of the Victorian Pig Industry*

“…An analytical model of industry response to regulation is presented below. This model owes much to similar models developed to analyse research benefits (Lindner andJarrett 1978, 1980;Rose 1980;Johnston 198 1;Edwards and Freebairn 1983). The model is used to estimate the social costs of regulation in terms of the changes in economic surplus, and its distribution.…”

“…The difficulties of self-regulation by industry will not be lost on the movement, which will continue to demand direct regulation of the industry by state governments. Recommendation for such regulation is likely to come from the Senate Select Committee inquiry into animal welfare issues (Neales 1985).…”

Some Market Effects of E-Commerce

“…In this context, the way in which e-commerce shifts down the industry supply curve depends on cost reductions for each firm and o n the location of different firms on the supply curve. As argued by Rose (1980) and Lindner and Jarrett (1980), in practice it is difficult to allocate firms along an industry supply curve. Thr: initial guess that relatively low variable cost firms are inframarginal producers and high variable cost firms are marginal producers ignores likely differences in opportunity returns and costs to firm specific factors.…”

Bureaucratic productivity: The case of agricultural research revisited ? A rejoinder

“…The contribution of Lindner and Jarrett (1978) was their demonstration that the Griliches methodology underestimated the range between upper and lower rate of return estimate under alternative (privotal, proportional, parallel or convergent) supply curve shifts. Pasour and Johnson fail, however, to mention the Lindner and Jarrett (1980) response to Rose (1980) and to Wise and Fell (1980), in the same issue of the AJAE, in which Lindner and Jarrett concede that they overstated the sensitivity of gross research benefits to the nature of the supply shift. My own evaluation of this exchange is consistent with that now adopted by Lindner and Jarrett -the discussion 'diverted attention toward the relatively unimportant question of supply and/or demand elasticities, and away from the more important issue of the effects of adoption of the innovation on production costs' (p. 842).…”