Working Papers 2002 – Abstracts
Who Bears the Burden and Who Receives the Gain? - The Case of GWRDC
R&D Investments in the Australian Grape and Wine Industry
Xueyan Zhao
In 2001, $13 million were invested in various grape and wine R&D programs
via the Australian Grape and Wine Research and Development Corporation.
Half of the funds come from compulsory levies from grape-growers and winemakers,
and the other half from Commonwealth government matching grants. These
funds are then allocated to research projects across broad areas such
as grape production R&D, wine production R&D and grape and wine quality
R&D. The benefit of R&D in one sector of an industry will be distributed
across the production and consumption chain. On the other hand, when a
levy is charged nominally to one producer group, the real burden of the
cost will also be shared among all involved producer and consumer groups.
In the case of the Australian grape and wine R&D investments, the net
impact will be determined by the distributions of both the benefits and
the costs across grape-growers, winemakers, marketers and retailers, and
domestic and overseas consumers. In an ideal situation, if every dollar
is invested at exactly the point where it is collected, the percentage
distributions of costs and returns coincide. Under this system, presuming
R&D projects are successful, all groups will gain in dollar terms, and
they will receive benefits in exactly the same proportions as how the
burdens of the R&D costs are shared. However, the distributions of costs
and benefits will diverge if a levy collected at one point of the production
is used to fund research at a different point of the chain. Indeed, in
practice, producers often pool levies together to fund R&D programs at
places that are not necessarily where the funds are raised. A significant
amount of the public funds are also invested in the Australian agricultural
industries that substantially involve foreign processors and consumers.
In these situations it is important to note the real incidence of both
costs and benefits. The objective of the paper is to examine the distributions
of both costs and returns from the Australian grape and wine R&D investments,
using results from a multi-sectoral equilibrium displacement model of
the industry. The real shares of total R&D costs are estimated and compared
with the nominal shares. For example, while the total R&D costs in 2001
for the industry are paid nominally 18.9% by grape-growers, 31.1% by winemakers,
50% by the government and taxpayers, and 0% by overseas consumers, the
real burdens are shared by the four groups in the proportions of 14.3%,
20.6%, 57.7% and 7.4% respectively. Divergence between the distributions
of costs and benefits is also studied for the three major areas of R&D.
Grape-growers, winemakers and overseas consumers are shown to receive
bigger proportions of the gains than their proportions of costs, but the
Government and other domestic parties as a group bear a much higher proportion
of costs than returns. The paper discussed implications of the results
to the equity issue between premium and non-premium wine producers, the
free-rider issue for overseas consumers, and the issue of justifying government
funding of grape and wine R&D.
Keywords: Economics of R&D, R&D policies, incidence of levies,
wine, equilibrium displacement modelling.
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