Date Published: February 7, 2019
Publisher: Public Library of Science
Author(s): Erik Nelson, John Fitzgerald, Nathan Tefft, Jacint Balaguer.
Consumer spending on organic food products has grown rapidly. Some claim that organics have ecological, equity, and health advantages over conventional food and therefore should be subsidized. Here we explore the distributive impacts of an organic fruit subsidy that reduces the retail price of organic fruit in the US by 10 percent. We estimate the impact of the subsidy on organic fruit demand in a representative poor, middle income, and rich US household using three analytical methods; including two econometric and one machine learning. We do not find strong evidence of regressive redistribution due to our simulated organic fruit subsidy; the poor household’s relative reaction to the subsidy is not much different than the reaction at the other two households. However, the infra-marginal savings from the subsidy tend to be larger in richer households.
One could argue that organic food production is a Clean Technology (CT) that deserves subsidization. CT produces a good with fewer environmental and human health impacts than a similar good produced by a more mature but ‘dirtier’ technology . However, the goods produced by a CT have higher average production costs than the very similar goods produced by the ‘dirtier’ technology . Despite incentivizing industry to incur higher-than-necessary production costs, subsidization of CT can make society better off if its use incidentally generates benefits that are greater than additional costs (e.g., ). Not only can subsidization of a CT generate immediate social welfare if the total subsidy is less than the external benefit created by use of the CT, but subsidization of the CT’s use accelerates the decline in the clean technology’s average cost of production via learning-by-doing (e.g., [3–4]) and the creation of economies of scale (e.g., ), promising even more welfare in the future.
We predicted the impact of an organic fruit subsidy on patterns of organic fruit consumption and expenditures across US households of different income classes. We were particularly interested to determine if the subsidy would, on average, favor households from a certain income class. If we estimated significantly larger inframarginal savings and a particularly elastic response to the subsidy in one class it would suggest that the subsidization would re-distribute some social welfare to that class, especially if the revenue for the subsidy came from the general taxpayer.