PRODUCER SURPLUS WITHOUT APOLOGY - EVALUATING INVESTMENTS IN RESEARCH-AND-DEVELOPMENT

Comparison of producer surplus with definitive measures based on the p rofit function reveals potential problems with using changes in produc er surplus to measure the benefits of some common types of technical c hange. Some illustrative applications indicate that the conventional p roducer surplus measures may seriously under-estimate the change in pr ofit induced by new technology, depending on the characteristics of th e underlying technology which define the nature of the supply function , and the nature of the technical change. We provide guidelines for id entifying cases where producer surplus will under-estimate producer re search benefits, and suggest alternative measures.