Producer Surplus as a Measure for Opportunity Cost: The Case of Corn Farming on the Hill of Mount Rinjani - Indonesia

Headnote

Abstract

Opportunity Cost is a decision making tool to select a more appropriate alternative for a final decision. The usual measure for opportunity cost is farm profit or income. This paper aims at: (1) introducing producer surplus as a measure for opportunity cost; (2) utilizing producer surplus as a determinant in deciding actions that provide the best benefit for farmers.

To achieve the above objectives, a research was conducted on 120 units of corn farming on the hills of Mount Rinjani, i.e. in Bebidas Village and PringgabayaUtara Village. Data were collected through face-to-face interviews guided by a structured questionnaire.

The study concludes the followings: (1) Producer surplus can be applied as an alternative measure for opportunity cost; (2) If the farmers are expected to leave the corn farming, they need to gain a compensation of IDR 2 million/ha in order to maintain welfare; (3) Producer surplus can also be used as a measure for opportunity cost for any other farms.

JEL classification numbers: H62

Keywords: producer surplus, opportunity cost, compensation, decision, corn farm

(ProQuest: ... denotes formulae omitted.)

1 Introduction

One of the main programs of the local government is the development of corn farming through expansion of the corn farming area ([1]; [2]). The expansion of the corn crop is done on dry land in the rainy season (November to April) and on wetlands in the dry season (July-October). Farmers (land owners) have two options, i.e., planting the corn on their land or lease their land to other farmers ([3]). When the first option is chosen, then it will certainly requires additional direct costs, such as the costs of inputs of production and wages of non-family labors, and indirect costs, such as the cost of family-labors, equity interest, land rent and depreciation of equipment that is often overlooked ([4]). Income and welfare the farmers gained act as a motivation to run corn farming. However, do farmers obtain a net benefit greater than the entire sacrifice? How much is the benefit? When farmers choose to lease their lands to other farmers, the motivation is to obtain rental income in advance. This article attempts to explore this issue.

Farmers on the hill of Mount Rinjani consist of dryland and wetland farmers. Farmers in dry land...