Research aimed at increasing agricultural productivity is provided by both private and public sectors. While the private sector's contribution to agricultural research is significant, provision of these activities solely by the private sector would not be optimal because of the existence of various types of market failure. Externalities or spillovers, which are commonly cited as a major form of market failure, clearly are evident with some types of agricultural research. Private firms would be able to capture only a portion of the benefits resulting from such research activities. It is well known that private markets may produce inefficient output levels in the face of these externalities. Government involvement in this area, therefore, may be necessary in order to correct for potential inefficiencies and inequities that would otherwise occur. However, the problems associated with externalities from agricultural research are not eliminated simply by having the government provide the service. Benefits resulting from publicly provided research accrue not only to the producers in the state in which the research is conducted but also may spillover to producers in other states. This type of spillover from agricultural research expenditures has been recognized in a number of previous studies. However, agricultural producers capture only part of the total benefits resulting from agricultural research activities. Consumers benefit as a result of expanded farm production and attendant lower prices. Thus, benefits from efforts to increase agricultural productivity may accrue both within the state conducting the research and in other states, as well. The pervasive nature of agricultural research results affects the efficient allocation of resources and equitable financing of expenditures to improve productivity in agriculture. The overall objective of this paper is to conceptually examine the impact of externalities associated with publicly provided production-oriented agricultural research activities. Policy implications resulting from externalities will be explored. Particular attention will be focused on the efficient allocation of agricultural research and its equitable financing while accounting for externalities.