1. ECONOMIC SURPLUS MODEL:
A Tool for Ex-Ante Impact Assessment
JAIPRAKASH BISEN (10562)
Ph.D. Ist Year
Division of Agricultural Economics
Indian Agricultural Research Institute, Pusa
New Delhi-110012
Speaker

2. Scheme of Presentation
1) Concept of Impact and Impact Assessment
2) Basic Questions on Impact Assessment
3) Economic Approaches to Impact Assessment
4) Economic Surplus Model (ESM)-
a) Introduction
b) Basic Assumptions of ESM
c) Model Specification
d) Reasons for Popularity of ESM
5) Practical Aspects of Using the ESM-
a) Type of Data Required
b) How to Use the Model / How to Calculate Economic Surplus
6) Merits of Economic Surplus Model
7) Limitations of Economic Surplus Model
8) Improvements Over ESM
9) Scope of Using ESM
10) Case Studies

3. 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

4. • 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

5. 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. net
Accessed on -07/07/2016

6. 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-Ante
Ex-Post

7. 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.

8. 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…

9. 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.

10. 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.

11. 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

12. Concept of Economic Surplus
PRICE
QUANTITY
P
D
S
S
D
e
O
Q
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.

13. • 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.

14. 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 unknown
3) Assumption of closed economy
4) 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

15. Model Specification
For 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).Price
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)

16. For a Open Economy with parallel supply shift-
Where
PW = World price
Q0 = Base quantity
K = proportionate reduction in cost per ton of production
ɛ = Price elasticity of supply
Model Specification
Price
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)

17. 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

18. Practical Aspects of Using ESM
In General
Price
Quantity0
S0
S1
D
P0
P1
a
b
cd
I 0
I1
Q0 Q1
Δ TS = +
Δ CS = +
Δ PS = -

19. Variant- 1 Variant- 2
Technological innovation
leads to COST REDUCTION
Technological innovation
leads to INCREASE IN SUPPLY
PRICE
QUANTITY
P0
D
S0
D
e0
O Q
P1 S1
e1
PRICE
QUANTITY
P0
D S1
D
e0
O Q0
e1
S0
Q1
Change in Economic Surplus = P0e0e1P1 Change in Economic Surplus = Q0e0e1Q1
Continue…

20. Continue…
PRICE
QUANTITY
P0
S0
D
e
O
Q1
S1
Q0
P1 e’
PRICE
QUANTITY
P0
S0
D
e
O
Q1
S1
Q0
P1 e’
PRICE
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)

21. 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)

22. 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

23. Computation of ES Using Spreadsheet
Hypothetical Example.xlsx

24. 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.

25. 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.

26. 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 By
01. MODEXC International Centre for Tropical Agriculture
(CIAT)
02. RE4 Australian Centre for International Agricultural
Research (ACIAR)
03. Dynamic
Research Evaluation for
Management (DREAM)
International Food Policy Research Institute
(IFPRI)
04. Spreadsheet Approach -------------------------------------

27. 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.

28. Case Study- 1 ( Ex-Ante Impact Assessment)
ITEMS PARTICULARS
Year of Publication 2011
Area All over India ( Eastern, Western, Northern, & Southern
regions)
Year of Study 2009
Production 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

29. 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

30. SIMULATED GAINS IN ANNUAL ECONOMIC SURPLUS FROM Bt
BRINJAL CULTIVATION UNDER DIFFERENT SCENARIOS AT
ALL-INDIA LEVEL
Results

31. Case Study- 2 ( Ex-Post Impact Assessment)
ITEMS PARTICULARS
Year of Publication 2012
Area Anantapur, AP
(Drought prone district)
Year of Study 2006-08
Area Under groundnut 819 thousand Ha. (75% of GCA of district) & 15% of GN area
of Country
Rainfall Scenario Deficit rainfall by 35% in June, July % Aug, and 31% deficit in
September
Groundnut Growing
Season
Kharif (July-September)
Rulling Variety TMV 2 (1970- 2005)
Technological
Intervention
ICGV9114 (2002-03)

32. ITEMS PARTICULARS
No. of Respondents 400 (200+200)
Village Covered 49 (out of 68)
Mandal Covered 8
Method 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)
RESULT
Variety TMV 2 ICGV91114
Yield 567 kg/ha 704 kg/ha
Total Revenue 17398 22060
Total Cost 7898 9235
Net Benefits 9500 12825

33. 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

34. Thank You For Pleasant
Listening