EEP101/econ 125 Lecture 12 Adoption and the Environment

David Zilberman

 Need to choose

How to analyze adoption choices?a multistage process

Whether to adopt a technology How to use it optimally- the decision process

Quantify each of the technologies- in terms of productivity, externality and costs Assess the best use of each technology and the net reward it generates Select the best technology Conduct Sensitivity analysis
Identify the conditions under which you select each technology

We use conservation technology as an example

Quantifying a technology
Y=Fi(X1,X2,X3,Q1,Q2) production function i= technology 0= traditional,technologies 1,. I new Y output Xn quantity of input n Qm quality indicator m Z=Gi(X1,X2,X3,Q1,Q2) Pollution function relating output to inputs P output price Wn=rice of input n V pollution tax Ki = fixed cost of technology i

Assessing Optimal use of technology i

VPi=Variable profit of technology I VPi=Max PFi(X1,X2,X3,Q1,Q2) W1X1- W2X2-W3X3Revenue Cost -VFi(X1,X2,X3,Q1,Q2) Pollution tax Optimality conditions P(dFi/dXn)- Wn - V(dGi/dXn) =0 Marginal -price- Matgianl polu Revenue cost

The adoption choice

The optimal technology is i*=MAX(VPi-Ki) The optimal technology maximizes variable profit minus fixed cost If you have two technologies i=0 and 1 i*=0 if (VP0-K0>VP1-K1) and vice versa

Choices over time

Suppose new technology does not require investment and the new technology lasts three years and requires K1. VPit is annual variable profit of technology i at year t. where t=0,1,2 The new technology is adopted if VP10-VP00+(VP11-VP01)/(1+r)+(VP12-VP02)/(1+r)2 > K1 Here A technology is adopted if it has the largest net present value

Sensitivity analysis
How changes in parameters affect the optimal input uses and technology choices For example if Q1 is an indicator of land quality and d(VP1-VP0)/dQ1 <0 namely the difference between the variable profits of the new technology (i=1) and the old one is declining The new technology is more likely be adopted at low land quality

 Output/acre is a function of effective input ( water) Y=f(E) E effective water actually used by crop Effective water is applied water (X) times input use efficiency h(q,i) which increases with land quality q and
technology i

Conservation technology

h(q,0)=q input use efficiency of technology o is equal to q for

simplicity

h(q,1) >q input use efficiency of modern technology is greater than q. On average land input use efficiently with traditional technology q=.6 with sprinkler.8 and drip .9

Production and pollution functions

Y0=f(Xq) Z0=(1-q)X=pollution is residue Y1=f(Xh(q,1)), Z1=(1-h(q,1))X Optimal input sue technology 0 Find X=X0* that Max Pf(Xq) wX-v(1-q)XOptimal input for technology 1 Find X=X1* that Max Pf(Xh(q,1)) wX-v (1-h(q,1))XK1 First order condition at Xo* Pqdf(Xq)/dE w-v(1-q)=0 at X1* Ph(q,1)df(E)/dE wX-v(1-h(q,1))=0

Assessing adoption
The decision making process that leads to adoption includes several stages First assessing the optimal input use with each technology For example if there are two technologiestraditional and modern - you first find optimal input use and profit under each technology

The second stage is choosing the technology with most profit Incentives change adoption choices

Example: Irrigation(Hypothetical/California)
Increased yield, reduced water, and reduced drainage costs more. Low-cost version (bucket drip, bamboo drip) exists.
Impact greater/adoption higher on lower quality landssandy soils
and steep hills.

More adoption with high-value crop, high prices of water drainage, and
output.

Technology
Traditional Sprinkler

Irrigation efficiency

Water/ drainage

Yield (cotton)

Fixed cost/yr
500 580

.6 .8

4.0/1.6 3.2/.64

1200 1325

Drip

.9

2.7/.27

1400

650

Optimal input use for a technology

P-output price,W=input price,V pollution price K1 per season cost of modern technology K0=0 per season cost of Traditional technology Choice of input use with a given technology PRi=Max Pf(hX)-WX-V(1-h(q,i))X-Ki Optimal rule Choose X so that
P f ( E ) h - W - V [1 - h(q, i )] = 0 E

VMP of applied water=price of applied water+value of marginal residue VMP=value of marginal product

Optimal choices traditional technology (i=0) Given: Q = 10 E - 2 E 2 P = 2; W = 4; V = 2 K 0 = 2 Given: q = 0.6, I = 0 h(0.6, 0) = 0.6 for tech 0 Q( E ) The first order condition becomes: = 10 - 4 E E Q( E ) P g - W - V [1 - g(q, I )] = 0 E Q( E ) P g = W + V [1 - g(q, I )] (rearranged) E 2(10 - 4 E )0.6 = 4 + 2[1 - 0.6] Etech0 = 1.5 X tech0 Etech0 1.5 = = = 2.5 g(q, I ) 0.6

Qtech0 = 10(1.5) - 2(1.5)2 = 10.5 p = PQ - WX - V [1 - g(q, I )]X - K

p tech0 = 2(10.5) - 4(2.5) - 2(0.4)(2.5) - 2 = 7

Optimal choices modern technology i=1 Given: Q = 10 E - 2 E 2 P = 2; W = 4; V = 2 K1 = 5 Given: q = 0.6, I = 1 h(0.6,1) = 1 for tech1 Q( E ) The first order condition becomes: = 10 - 4 E E Q( E ) P g - W - V [1 - h(q, I )] = 0 E Q( E ) P g = W + V [1 - h(q, I )] (rearranged) E 2(10 - 4 E )(1) = 4 + 2[1 - 1] Etech1 = 2 Etech1 2 X tech1 = = =2 h(q, I ) 1 Qtech1 = 10(2) - 2(2)2 = 12 p = PQ - WX - V [1 - h(q,1)]X - K

p tech1 = 2(12) - 4(2) - 2(0)(2) - 5 = 11

Optimal Techno log y choice Compare p tech0 = 2(10.5) - 4(2.5) - 2(0.4)(2.5) - 2 = 7 With p tech1 = 2(12) - 4(2) - 2(0)(2) - 5 = 11 Techno log y 1 preferable and will be adopted IF K 0 = 1 and K1 = 9

p tech0 = 2(10.5) - 4(2.5) - 2(0.4)(2.5) - 1 = 9 p tech1 = 2(12) - 4(2) - 2(0)(2) - 9 = 7 Techno log y 1is not adopted Higher fixed cos t reduce the likelihood of adoption

Outcomes under the traditional technologies with and without taxes

VMP Traditional

W+marginal externality traditional D *

W+marginal externality modern

A
Xold After tax

Xold X Before tax

VMP modern

Before the externality is regulated more input is used with the dirtier technology. The modern technology is saving input and increasing yield gain may not justify extra cost.

VMP Traditional

B
Xnew Before tax

Xold X Before tax

VMP modern

Externality tax reduce input sue and out put of Polluting technology.It sued more input before May use less after tax

VMP Traditional

W+marginal externality traditional D *

C W+marginal externality tmodernl

B
Xold After tax Xnew Xnew After Before tax tax

Xold X Before tax

The Adoption choice

Choose the modern technology if Profits1 is greater from Profits0. Higher input taxed and output taxes and lower capital costs will increase adoption Adoption is more likely on lower land quality Adoption is more likely when
output price is higher Input price is higher Pollution tax is higher

Another Example slightly different production

function
Y=10E-E2 q=.5 MPE=10-2E,MPX=MPE*q g(.5,0)=.5; g(.5,1)=1 Input use efficiency of traditional technology is 50% of modern is 1 P=2.W=4.V=4 K0=0,K1=20 Optimal X0 2(10-X)*.5=4+4(1-.5) hence X0=4 Optimal X1 2(10-2X)=4 hence X1=4 Y0=16 Y1=24 Z0=2, Z1=0 Profit0=32-16-8=8 Profit1=48-16-20=12 adopt The difference in operational profits (32-12) covers the extra fixed cost (20) Adopt if K1<24 Another case no pollution tax P=2.W=4. V=0 K0=0,K1=20 X0=6,X1=4 Y0=21 YI=24 modern technology increases yield and saves water Profit0=42-24=18 Profit1=48-16=32 The operational profits gain from adoption is 14 Adoption is not worth while 20>14

Adoption & environmental quality

$ Profits increase with quality Below a threshold level there is no operation Profit traditional

technology

0 1 Q-quality

Adoption & environmental quality

PR0 =Profit traditional technology
$ PR1 =Profit modern technology PR0 Adoption occurs at Low qualities between

qm and qc

PR1

qm

qc

1 Q-quality

Adoption and quality

PR1=Max Pf(g(q,1) X1)-W X1 -V(1-g(q,I)) X1 -K1 PR0 =Max Pf(g(q,0) X0)-W X0 -V(1-g(q,0)) X0 -K0 We know that
g(q,1) > g(q,0)- it increases input use efficiency At q=1 both technologies input use efficiency is equal to 1 and both technologies have the same output and input use K1> K0 New technology costs more

The yield increasing input saving and pollution reducing effects of the modern technology are higher at a range of lower technologies Adoption occurs at lower qualities

Impact of pollution regulation

Without pollution ax traditional technology is generating less output with more input After tax the modern technology may be using more input and output.The gap of output increases

Technologies and Substitution

At modern era technologies replace Human effort Natural resources with Human capital Physical capital Energy

The Change in Production Technologies

Input/output ratios have altered; the growth in population was accompanied by much less than proportional expansion of cultivated land and probably greater relative increase in energy use. There has, however, been increase in input use efficiencymore output use per unit of critical inputs resulting from new technologies Obvious examples are increased crop yield because of improved varieties. Traditional methods of breeding led to crop engineering which attained higher ratios of fruits to straw. The high productivity of agriculture slowed expansion of deforestation. However, it led to new environmental issues.

Resource-Saving Innovations Are Not Limited to Agriculture

The current level of global round wood harvest is the same as in 1976. It went up during the 1980s, declined, and has been stable for five years, less waste materials and use of recycled paper. Computing power-energy use and per unit computing cost has declined drastically (Moore law ). Miniaturization led to the same quality output with much less material and energy in communication, computing, radio, and clothing.

Other Examples
Technology
High precision chemical applicators

Alternative

Input-use efficiency

Impacts

Extra cost

Aerial sprayer .90 vs .25

Input-High pollution--

Improved cooking stove

Insulation

Traditional Wood stove

Un-insulated homes

.60 vs .20

Wood -Health++
Energy--

Modest

.7 vs ,2

Modest

The end