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USDA/AFRI Integrated Food Safety Project

U.S. Beef Industry Baseline & Cost-Benefit Analysis

Cost-Benefit AnalysisConceptually, the control of animal disease increases the efficiency of resource use and results in an increase in the supply curve out and to the right. The result is that more is produced at a lower market price, resulting in a new economic equilibrium and increased surplus to producers. Consumers also benefit as more is consumed at a lower cost. The distribution of these benefits depends on the underlying elasticity of demand for the product and is ultimately an empirical question. Benefits to both producers and consumers may result, but consumers gain potentially more as demand is less elastic.

Three methods are available to quantify the profit associated with any alternative technology. Net Present Value (NPV) considers present value of a future stream of incoming cash flows relative to costs. NPV compares today's value of the initial and ongoing costs associated with pathogen control to today's value of increased future sales receipts. These present values are calculated by discounting the future cash flows, whether inflows or outflows, by an appropriate interest rate. In order for a project to be feasible, an NPV ≥ 0 is required; that is, the present value of future increased sales receipts must be at least as much as the present valued of the initial and future costs incurred to control foodborne pathogens. Benefit-Cost Ratio (BCR) is a ratio which compares the present value of revenues to the present value of costs. If BCR = 1, then the present value of the revenues are identical to the present value of costs. When BCR > 1, there is a positive return as revenues are greater than costs; the opposite holds when BCR < 1. When comparing two or more pathogen control methods, higher BCRs are preferred to lower BCRs. Internal Rate of Return (IRR) also considers the present value of future revenue streams compared to the present value of associated costs. However, the IRR is the rate of return at which the NPV is equal to zero. This is also useful when comparing alternative investment scenarios. An investment into one pathogen control technique with a higher IRR is preferred to a technique with a lower IRR. At the same time, the IRRs should be higher than alternative uses. Otherwise, investing these funds into pathogen control may not make economic sense.