Comparison of the price adjustment program and subsidy scheme in Japan: Evaluation of domestic sugar support policy to internalize positive externalities

Abstract

Fiscally constrained governments prefer imposing tariffs instead of providing subsidies, despite tariffs distorting markets more than subsidies. Japan’s price adjustment program is designed to support the domestic sugar industry by imposing a tariff on imports and by subsidizing domestic production using tariff revenues. This study compared the program and a subsidy scheme using benefit/cost ratios and the degree of trade distortion. The main findings and their policy implications are as follows: 1) because the benefit/cost ratio for the program is greater than one, the program would be beneficial for Japanese people, 2) the ratios and trade distortions for the two policies are similar, thus the program works well when fiscal spending is constrained, as it requires less government spending, 3) using tariffs instead of the other two policies results in a smaller benefit/cost ratio and greater market distortion, 4) people are uncertain about their preference for the program, making them more accepting of it.