A change in world price due to policies in the ROW often has an effect on welfare in country an additional to the direct effect. This additional effect occurs because the ROW policy influences the gain to country A from its investment in research and promotion for the commodity. This paper examines how that may occur. It considers both research/promotion activities that lower the supply curve for the commodity and those that lift demand. The impacts of the ROW policy on the distribution of the benefits from research/promotion within country A are considered, as well as the effects on the size of those benefits.
The approach taken in this paper is to consider a number of cases. The cases are characterized by: (a) the direction of change (rise or fall) in world price due to ROW policy; (b) the type of shift )fall in supply curve or rise in demand curve) caused by country A’s research or promotion; and (c) country A’s trade status (exporter or importer). Cases 1 and 2 consider the effects of a fall and a rise, respectively, in world price of the commodity on the gains from supply-shifting research in an exporting country. In cases 3 and 4, the effects of a fall and a rise, respectively, in world price of the commodity on the gains from demand-lifting research or promotion are examined for an exporting economy. The analysis developed in cases 1-4 is then extended in outline form by allowing country A to be a net importer.
Both geometric and algebraic models are developed for assessing country A’s gains from research/promotion. Empirical analysis is included to demonstrate the potential importance of the impacts of foreign policies on country A’s gains from research and promotion. This analysis includes a comparison of the two effects-identified above-of ROW policy on welfare in country A: the direct effect due to the change in world price caused by the policy in the absence of research/promotion-induce shifts in supply/demand, and the additional (or indirect) effect of the policy on the welfare gain to country A from its investment in research and promotion. The methodology developed in this paper is applied to the Australian beef industry as a case stuy. The size and distribution of the social costs of research/promotion associated with a policy induced reduction in world price are quantifies using the conventional producer-consumer surplus framework.
Voon, T. J. (1996). Impacts of foreign policies on the gains from research and promotion (CAPS Working Paper Series No.43). Retrieved from Lingnan University website: http://commons.ln.edu.hk/capswp/43