AN ECONOMIC EVALUATION OF COTTON AND PEANUT RESEARCH IN SOUTHEASTERN UNITED STATES



The internal rate of return on investment in peanut research indicates every dollar invested
yielded an average $1.24 return in terms of annual social benefits.

Recall that the total benefits used in the IRR calculations utilized price elasticities of
demand and supply based only on assumptions of what the true elasticities are. The price
elasticities of demand were drawn from the literature and the price elasticities of supply were
estimated in the regression analysis. Recognizing that these assumptions may be subject to error,
four additional analyses were performed to evaluate the sensitivity of the results to changes in
these assumptions. The price elasticity of supply for both commodities is increased and
decreased by one standard error. The price elasticity of demand will also be varied up and down
by the standard error from the study from which it was drawn. For Zhang, Fletcher and Carley
(1992) that is .03. For cotton, that is by . 10 based on White and Wetzstein (1995), which partly
relied on the work of Shui, Shangnan, Beghin and Wohlgenant (1993). Results are displayed in
Table 5.

By increasing the price elasticity of demand, a portion of the consumer surplus area is
reduced and a portion of the producer surplus area is increased. The net reduction in the surplus
area reduces the benefits associated with the same level of research investment, therefore
decreasing the internal rate of return. This same mechanism increases the internal rate of return
when the price elasticity of demand is decreased for both commodities. However, by increasing
the price elasticity of supply the rate of shifts in the production function resulting from
investment in research is decreased. The slower the rate of change of the production function
shift, the smaller the producer surplus area and consumer surplus area. This reduction in the
areas of consumer and producer surpluses reduces the internal rate of return on investment in
research on each commodity.

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