The International Consortium on Agricultural Biotechnology Research (ICABR)
Assessing Irreversible Cost
and Benefits of Transgenic Crops:
a Real Option Approach
Wageningen Agricultural University
The scientific revolution in the biological sciences with its rapid advances in molecular genetics offers great potentials for productivity gains in agriculture. Food crops with higher yields and better nutrition content, plants that are resistant to drought and pests, livestock that are immune to disease, and fisheries that are sustainable, are possible developments which can result from the application of biotechnology.
However, opposing the expected direct benefits, there are risks related to the widespread use of transgenic crops. While some of these risks are highly unlikely, little is known about the overall impact that transgenic crops can have on biodiversity, ecosystem balance and the environment. In this paper these risks are seen as additional irreversible costs related to the release of transgenic crops. These irreversible costs, their uncertainty and the uncertainty about future direct benefits result in a real option value favoring a delay of the release of transgenic crops. A fact well-known in real option theory but ignored in most of the cost benefit studies on transgenic crops. Aside from the irreversible costs there are also irreversible benefits of releasing transgenic crops. One could think of the reduction in pesticide use of insect resistant crops. These irreversible benefits provide an incentive for an immediate release of transgenic crops into the environment. Hence, the optimal decision to release transgenic crops into the environment will not only depend on the direct costs and benefits but also on the trade-off between irreversible costs and benefits and is an improvement of a model version presented earlier.
The model has been applied to the EU. The expected benefits of the first generation of transgenic crops were estimated based on farm level data provided by EUROSTAT combined with information about the rate of adoption in the United States. Instead of directly estimating the irreversible costs they were calculated as the residuum. The irreversible benefits were identified using secondary data sources.
The results among others suggest that even if irreversible benefits are included the decision of the European Union to delay the release of transgenic crops can be justified from an economic point of view.
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