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Who Bears the Burden and Who Receives the Gain? - The Case of GWRDC R&D Investments in the Australian Grape and Wine Industry

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  • Xueyan Zhao

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Abstract

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 distribution of the benefits and 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 public funds are also invested in 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. 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 discusses 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.

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Bibliographic Info

Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 15/02.

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Length: 16 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:msh:ebswps:2002-15

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Keywords: Economics of R&D; R&D policies; incidence of levies; wine; equilibrium displacement modelling.;

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References

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  1. J. M. Alston & J. D. Mullen, 1992. "Economic Effects Of Research Into Traded Goods: The Case Of Australian Wool," Journal of Agricultural Economics, Wiley Blackwell, vol. 43(2), pages 268-278.
  2. Xueyan Zhao & Kym Anderson & Glyn Wittwer, 2002. "Who Gains from Australian Generic Wine R&D and Promotion?," Centre for International Economic Studies Working Papers 2002-04, University of Adelaide, Centre for International Economic Studies.
  3. Zhao, Xueyan & Mullen, John D. & Griffith, Garry R. & Griffiths, William E. & Piggott, Roley R., 2000. "An Equilibrium Displacement Model of the Australian Beef Industry," Research Reports 28007, New South Wales Department of Primary Industries Research Economists.
  4. Xueyan Zhao & Kym Anderson & Glyn Wittwer, 2003. "Who gains from Australian generic wine promotion and R&D?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 47(2), pages 181-209, 06.
  5. Findlay, Christopher C & Jones, Robert L, 1982. "The Marginal Cost of Australian Income Taxation," The Economic Record, The Economic Society of Australia, vol. 58(162), pages 253-62, September.
  6. Zhao, Xueyan & Mullen, John D. & Griffith, Garry R., 2005. "Economic Surplus Measurement in Multi-Market Models," Working Papers 12910, University of New England, School of Economics.
  7. Wittwer, Glyn & Berger, Nick & Anderson, Kym, 2003. "A model of the world's wine markets," Economic Modelling, Elsevier, vol. 20(3), pages 487-506, May.
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Cited by:
  1. Julian M. Alston & John W. Freebairn & Jennifer S. James, 2004. "Levy-funded research choices by producers and society," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(1), pages 33-64, 03.
  2. Zhao, Xueyan & Anderson, Kym & Wittwer, Glyn, 2003. "Who gains from Australian generic wine promotion and R&D?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 47(2), June.

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