Author: Isabelle Sin
This research note considers the decision faced by farmers who have the option of adopting a new, environmentally friendly production technology. It discusses why the rate of adoption is likely to deviate from the rate that is socially optimal, and outlines potential roles for intervention in reducing the difference between the two.
A farmer’s decision to adopt a new technology is largely based on balancing the economic costs against the economic benefits. The technology will be adopted if it yields an expected profit that is high enough to compensate for any higher risk it offers relative to current technology. In particular, when there is an irreversible cost of adopting, there is an option value to waiting to adopt. This option value means adoption may not occur until the expected benefits are substantially larger than the costs.
The socially desirable adoption rate occurs when each farmer adopts if the present social benefits of adoption exceed the present social costs. However, the actual rate of adoption may differ from optimal because private benefits differ from social benefits, or because of other market imperfections.
In the absence of intervention, private and social benefits will differ because most of the benefits of reducing pollution accrue to society as a whole, not to the mitigating farmer. They will also differ for potential early adopters because, when making their adoption decisions, they do not consider the value to others of the information about the technology that they generate from their experiences. Suboptimal adoption may also occur because information about the new technology that would inform the adoption decision is a public good, and thus is under-provided by the market.
An intervention designed to efficiently increase the adoption of an environmentally friendly agricultural technology should address one of these problems. That is, it should reward farmers who reduce their emissions, subsidise early adoption of the technology and thus encourage the generation of knowledge about it, or directly enhance the generation and dissemination of credible information about the new technology.
However, any intervention should keep in mind that faster adoption of a new technology is not always better. Too-fast adoption can’t take advantage of the benefits of learning, and risks lock-in to an inferior technology at a social cost that could potentially be very high.
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