On the welfare effect of retail electricity subsidy in Vietnam

Abstract

PurposeThis research investigates how subsidy programs in Vietnam's residential electricity market affect consumers' well-being.Design/methodology/approachTwo perspectives are employed: cash transfer and quantity-based subsidy. The effectiveness of cash transfer is measured in three ways: benefit incidence, beneficiary incidence and materiality. The quantity-based subsidy is established under the increasing block rate pricing, with the first two block rates being lower than the marginal cost. To improve the quantity-based subsidy, the research examines the consumer surplus under four proposals.FindingsThe results show that both types of subsidies are ineffective in supporting the poor.Research limitations/implicationsIn order to achieve a more equal distribution among households, the subsidy program should remove all subsidized blocks and reflect the full marginal cost. Changes should be made to the price structure regarding both marginal price and intervals.Practical implicationsTo mitigate the impact of the quantity-based subsidy, the government should improve the cash transfer by reducing extortion and improving targeting efficiency, especially for poor households living in rented houses.Originality/valueThis paper is the first to discuss the welfare effect of the electricity subsidy in Vietnam. First, it comprehensively evaluates the cash transfer subsidy in Vietnam. Second, it suggests a modification in the residential electricity tariff.