Producer Surplus without Apology? Evaluating Investments in RD*

Comparison of producer surplus with definitive measures based on the profit function reveals potential problems with using changes in producer surplus to measure the benefits of some common types of technical change. Some illustrative applications indicate that the conventional producer surplus measures may seriously underestimate the change in profit induced by new technology, depending on the characteristics of the underlying technology which define the nature of the supply function, and the nature of the technical change. We provide guidelines for identifying cases where producer surplus will under‐estimate producer research benefits, and suggest alternative measures.