Supply of Domestic Bio-Ethanol and the Relative Value of Public Subsidy

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Abstract

Revealed preference method is used in policy decision making and many payment vehicles are applied for the evaluation of non-market goods. Especially, the hypothetical new tax is often used and this payment vehicle means a decrease of consumer's disposal income. However, because a policy is enforced by the existing revenue instead of the new tax, we have to decide the desirable cost to be prepared from the existing revenue for the new enterprise without changing disposal income. Therefore, evaluation of relative value between a new and an existing enterprise is necessary. Additionally, a change in public funding from existing revenues does not directly decrease a consumer's disposal income, so the consumer may not be able to evaluate the new enterprise because they do not feel the burden of the expense. This study focuses on bio-ethanol and estimates the appropriate subsidy for domestic production. First, the contingent valuation method was used to estimate additional willingness to pay for domestic bio-fuel with an increased price for gasoline by a decrease of disposal income. Next, to find the relative value of a disposal income and a reallocated tax, the relative value of and gasoline price and subsidies for domestic production of bio-ethanol were estimated by choice modeling and the subsidy for domestic production of bio-ethanol calculated based on these results. Results were as follows: First, the willingness to pay for domestic production of bio-ethanol by the decrease of disposal income was estimated as 3 yen per liter using a contingent valuation survey in Fukuoka Prefecture. Next, the relative value of the disposal income as a increase of gasoline price and the reallocated tax for domestic production was estimated as 0.708 by choice modeling and the subsidy for bio-ethanol production was evaluated as 4.24 yen/liter (=3 yen/liter÷0.708). Also, the marginal ratio of substitute between the subsidy for road construction paid by gasoline tax and the subsidy for domestic production of bio-ethanol was estimated and we found that a consumer's utility increases with public funding for bio-ethanol from existing gasoline tax. A tax revenue of 1 yen per liter is equivalent to a revenue of 6 million yen per year, so a considerable subsidy would be accepted if the nation has the same propensity as Fukuoka residents.

Original languageEnglish
Pages (from-to)567-583
Number of pages17
JournalStudies in Regional Science
Volume39
Issue number3
DOIs
Publication statusPublished - Jan 1 2009

All Science Journal Classification (ASJC) codes

  • Environmental Science(all)
  • Social Sciences(all)

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