Experts in agricultural research and development (R&D) have determined that an i

Question

Experts in agricultural research and development (R&D) have determined that an investment program to develop an alternative pesticide technology that would achieve the productivity gains without causing the negative externalities would cost $50 million dollars and result in social benefits of $10 million dollars annually in perpetuity. The $50 million R&D investment program would be performed by a consortium of private firms. However, because of spillovers, the private benefits appropriated by the consortium would be only $3 million annually in perpetuity. The private and social required rates of return (hurdle rates) are the same and equal 10%.

a. Is the R&D investment program socially beneficial? Explain. Will the private sector undertake the R&D in the absence of public support? Explain.

b. Explain the design of a public policy that would subsidize the private performance of the R&D (to ensure that the research is done by the private sector) yet would minimize the public funds used.

Explanation / Answer

a)Yes the R&D investment socially beneficial s it is the field of agriculture and also it results in social benefits of $10 million dollars.Yes the private sector can undertake the R&D in the absence of public support because investment of private company is involved in this R&D program and if it does not continue as well as planned then in absence of public support private sector will undertake it.!!

b)Design of public policy should be such that they can show the importance of this program to the government to the people so that they can subsidize the private performance of the R&D and hence design policy includes collaboration, subsidies and R&D performance empirical evidence.!!

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