7. Meeting the Expected Profitability Condition

7.1. Read the text.

An agricultural technology may dramatically increase yields or agricultural output but that does not necessarily mean that it should be adopted. For example, some crops may have higher yields but also may be more sensitive to drought. Making these technologies profitable requires large investments in irrigation infrastructure, which – in some places – may be very costly.

Once the added costs of infrastructure development are factored in, the comparison of costs and benefits for the new crop may not make it worthwhile for either society or for the individual. The individual farmer would benefit more from receiving the money directly since the costs of the technology are greater than the benefits. When calculating whether or not a technology is worthwhile, it is therefore important to take into consideration the labor and capital investments that are necessary to enable adoption of the technology.

In the irrigation example, the labor and capital costs of infrastructure development are real costs. In general, if the real costs are less than the total value created by higher adoption rates, then the investment is worthwhile. However, market inefficiencies may add additional “costs” that make the project appear unprofitable. For example, investments with high initial fixed costs, such as irrigation development, may present difficulties for securing a loan if credit markets are weak. The initial investor may not be able to recover these fixed costs from future users if contracting is difficult. Similarly, at the household level, worthwhile investments may be bypassed if market inefficiencies lower the profits that the farmer receives from adoption. In addition to market imperfections, profitability is also affected by factors that range from individual tastes and preferences to macroeconomic policy.

7.2. Answer the questions:

1. Should an agricultural technology be adopted if it dramatically increases yields or only agricultural output?

2. Why does making these technologies profitable require large investments?

3. When may the comparison of costs and benefits for the new crop not make it worthwhile for either society or for the individual?

4. What if the real costs are less than the total value created by higher adoption rates?

5. Why may investments with high initial fixed costs, such as irrigation present difficulties for securing a loan?

6. Why may the initial investor not be able to recover these fixed costs?

7.3. Complete each sentence with one of the following words:

labor and capital benefits drought inefficiencies

1. Some crops may have higher yields but also may be sensitive to … .

2. The individual farmer would benefit more from receiving the money directly since the costs of the technology are greater than the … .

3. When calculating whether or not a technology is worthwhile, it is important to take into consideration the … investments.

4. However, market … may add additional “costs” that make the project appear unprofitable.