Summary: Cost Benefit Analysis
Previous chapters focus on the description of the context of the study and the definition of the scope of this study. The household decision of improved wheat adoption will be made with the objective of profit maximization. The main objective of this research is to evaluate the cost and benefits resulting from adoption of improved wheat from the farmers’ perspective. The existing research as presented in the literature review allows to draw conclusions on the impact channels of adoption of improved wheat on households’ income. o Based on the positive evidence from across the world, the adoption of improved seeds is expected to increase crop-income of the households. Further it is expected to lead to different allocation of land and crop diversification. …show more content…
Following section provides a brief introduction of the method and its application to this particular study.
3.1. Cost-benefit analysis
The foundation of economic theory is that decision making of a rational individual is based on the comparison between costs and benefits. Cost-benefit analysis (CBA) builds on welfare economics, which distinct to economic theory, recognize the broader impact of public decisions on economic interests of more than one individual (Griffin 1998, p.2063). The application scope is wide and defined by any public decision affecting resource allocation (Brent 2006, p.3).
The decision rule of project approval in a CBA is usually subject to so called Kaldor-Hicks criterion, which requires the net gains to be positive without taking into account distributional effects. The criterion is complemented by the Kaldor-Hicks compensation principle, which states that a potential welfare increase can be realized when gainers, compensate the losers (Potts 2002, p.157). The principle has been established after the acknowledgment that the Pareto improvements are rarely achieved in reality (Potts 2002, p.157; Quah & Toh 2012,
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In the next steps cost and benefits are defined, categorized and monetized. The obtained values are discounted to NPV. Finally a sensitivity analysis is applied (Cellini & Kee 2010, p.495). In general the CBA applied in this study will follow the standard process apart from the procedure of net present value (NPV) calculation. The farmers do not invest, but only face increased input cost through adoption of improved seeds, hence the NPV would not provide any valuable information. On the contrary, considering the high price volatility of wheat and possible yield variability, a sensitivity analysis will be conducted in order to establish the risk to become unprofitable.
To evaluate the welfare impact of improved seed adoption, financial appraisal will be applied. The objective is evaluation of profitability of a given activity or project for participants. In the case of this study, farmers purchase more expensive improved seeds and potentially face other cost associated with adoption. The judgment of the project will be a result of financial profits possibly generated by the improved wheat adoption. Financial analysis applies market prices for monetizing (compare Brent 1998,
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