Fairness Norms and the Incidence of Environmental Subsidy

Abstract

Although fairness concerns are frequently discussed in the real world environmental politics, their effects are relatively neglected in the environmental economics literature. Using a survey method, this paper attempts to reveal how fairness norms affect the incidence of subsidy both in the short-run and long-run. The results indicate that statutory incidence (legal right to receive subsidy) affects people’s fairness norms on who should receive subsidy. In particular it is considered unfair for a firm to receive a part of the subsidy when it is legally granted to the consumer side. If firms avoid behaviors that are considered unfair, the tax and subsidy equivalence theorem may not hold under this situation. The survey results also reveal that fairness norms affect the incidence of subsidy in the long-run, in a sense that the allocation of gains that are generated due to subsidy is affected. People find it fair if allocation is made in proportion to firms’ own effort. Therefore, if an increase in profit is achieved by activities directly supported by subsidy, people find it less justifiable for firms to keep all the gains by themselves and thus firms may be forced to share the gains with consumers.