Justice and Financial
Market Allocation of the
Social Costs of Business
ABSTRACT. Regulation is often applied to business
behavior to ensure that the social costs of doing
business are included in the cost and pricing struc-
tures of the firm. Because the consumer benefits from
the transaction that generated the social costs, asking
the consumer to bear the burden imposed by the
transaction is fair. However, there may be a lack of
justice in the internal and external distribution of the
social costs of doing business if consumers are the only
party bearing that burden, or if the costs are being
shifted to employees or taxpayers when a closer stake-
holder is also benefiting from the transaction – the
stockowner. A social justice perspective requires that
those benefiting from a transaction share in the
burdens of it. We propose that a Tobin-like tax on
stock transactions might be a just means of achieving
greater justice in the distribution of the social cost
burden.
Sandra L. Christensen is an Associate Professor of
Management at Eastern Washington Unlversity. She
teaches Business and Society, Ethics, and Management
and the Natural Environment. Her research interests
lie in the areas of ethics, decision-making, and the
environment. Her work has appeared in Business Ethics
Quarterly, the Academy of Management Review,
and other management journals.
Brian Grinder is an associate professor of finance at Eastern
Washington University in Spokane, Washington. His
research interests include investments, corporate gover-
nance, financial history, and the use of technology in
education. The many ethical issues surrounding finan-
cial markets have long been of interest to Dr. Grinder,
and he hopes to make significant contributions to this
field of study.
Journal of Business Ethics 29: 105–112, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Sandra L. Christensen
Brian Grinder
Regulation is often applied to business behavior
to ensure that the social costs of doing business
are included in the cost and pricing structures
of the firm. For example, the costs of cleaning
up environmental pollution, or the costs incurred
from product liability suits are, through applica-
tion of law and regulation, taken into the firm
rather than left outside the firm as third-party
or social costs. Managers, in an attempt to
maintain profit levels, will pass these costs to
consumers if it is possible to do so. Because the
consumer benefits from the transaction that
generated the social costs, asking the consumer
to bear the burden imposed by the transaction is
fair. There is however, another class of stake-
holder in the firm that could share in the burden
of the social costs of its doing business – the
stockowner. A social justice perspective would
ask whether the placement of the burden for
product social costs on the consumer is a fair
distribution of the social cost burden, when the
stockowner clearly benefits through an increase
in wealth from the aggregate of the transactions
undertaken by the firm.
If it is determined that stockowners ought to
share the social cost burden generated by the
business conducted by the firm, the next step is
to find a practical means to achieve that end. In
keeping with the perspective that justice in
distribution of burdens and benefits is a societal
end, any means used to resolve the fairness issue
in internal firm distribution of burdens and
benefits must also be just from the societal per-
spective. One way to broaden the distribution
of social cost burdens across internal firm stake-
holders might be to make use of financial markets
to distribute costs to shareholders. A form of
Tobin tax1 on securities transactions, for example,
106 Sandra L. Christensen and Brian Grinder
would offer the opportunity to spread social costs
while not necessarily reducing the ability of the
firm to assess consumers as well. Would such a
solution cause injustice to others by creating new
third party burden-bearers?
This paper will present a background in social
justice theory and move towards a practical
model using a Tobin tax for application to
firms. The paper will also explore some of the
consequences of this choice of means to the
end of creating more internal justice in the
sharing of the burdens created by the business
of the firm. The purpose of the paper is to
illustrate a practical method to create a more
just distribution of social costs of business
through the financial markets, and thereby begin
a conversation about the ways in which we
choose to monitor and regulate business activity
in America.
A background in justice and economics
Standard neoclassical economic theory asserts that
the price mechanism works to bring together
willing buyers and willing sellers to complete an
exchange which is mutually beneficial, while at
the same time achieving an optimum allocation
of scarce resources in a society (Lipsey, 1997;
Phillips, 1997). A transaction, as described,
between two willing participants each acting for
her own benefit is voluntary, and therefore just
(Aristotle, 1985). However, few economists
would argue that such a “perfect” transaction
exemplifies the modern market system. There
are, most agree, market failures, and these failures
include transactions that are characterized by
externalities (effects of an activity are felt by
parties not participating in the exchange), and by
information asymmetries (parties to the transac-
tion have dissimilar knowledge of the transaction
or of its effects) (Lipsey, 1997; Myers and Majluf,
1984). When either of these two characteristics
are present, social costs may result, the transac-
tion is no longer entirely voluntary, and it may
result in injustice.
Externalities place burdens on parties that do
not benefit from the exchange transaction in
question. An example is environmental pollution.
When Texaco left Ecuador after pumping out
1.2 billion barrels of oil, the company left
behind toxic wastewater (Raeburn, 1999). The
wastewater is an externality because when
Texaco contracts with its customers to sell
the refined product – gasoline – from the oil,
the residents of Ecuador are not parties to
the transaction. They are, however, bearing a
burden from the transaction in increased health
costs and harm to their living environment.
These costs are not borne by the private indi-
viduals who entered into the contract, but instead
are costs generated by the transaction that
have been transferred to other individuals, or to
society.
Information asymmetries also generate social
costs. Consider the tobacco industry, for
example. For most of the history of tobacco use,
the transaction between smokers and tobacco
suppliers was considered mutually beneficial.
However, in recent decades, it has become
apparent that, not only are there externalities
attached to the transaction, but also, buyers of
tobacco products were not provided with the full
information necessary to make a rational choice
as to use of the product. There was information
available to the tobacco industry as to the safety
of the product that was intentionally withheld
from buyers. As evidenced by the recent cases
brought by state governments against the tobacco
manufacturers for recovery of health care costs
(which have resulted in large settlements by the
manufacturers), this information imbalance has
shifted significant costs from the private con-
tracting parties (smokers and tobacco firms) to
society.
While Aristotle (1985) argued that justice
requires voluntary action, a voluntary act to shift
the balance of benefit to oneself is not a just
action. Justice, for Aristotle, is:
the virtue that the just person is said to express in
the just actions expressing his decision, distributing
things good and bad, both between himself and
others and between others. . . . What is unjust is
disproportionate excess and deficiency in what is
beneficial or harmful. . . . In an unjust action
getting too little good is suffering injustice, and
getting too much is doing injustice (1985, pp.
85–86).
 Justice and Financial Market Allocation of the Social Costs of Business
Hence, the tobacco manufacturers’ decision to
not inform their customers of the dangers of the
product in order to maintain or increase their
own well being was unjust and resulted in
injustice. By the same reasoning, Texaco’s failure
to look to the third-party effects of their actions
in Ecuador was unjust and resulted in injustice.
In both cases, the firms’ decisions had the effect
of a disproportionate distribution of benefits and
burdens among the parties with stakes in the
transaction (stakeholders). In the tobacco case,
not only did the companies fail to consider the
social costs of the product, they did not accord
the primary contractors (the customers) the
respect due them in the exchange. In the case
of Texaco, however, both the customers and the
company did achieve benefit from their mutual
exchange transactions – the injustice occurred
in regard to parties not involved in the primary
exchange.
Once it is shown, however, that social costs
have been accrued and injustice has been done,
the question of the allocation of responsibility
to achieve a just distribution of benefits and
burdens of the already-completed exchange must
be addressed. Ought the individual parties to the
exchange themselves be responsible for ensuring
that the injustices are corrected? Or is this a
matter for society to correct? While it might
seem obvious that social costs are by definition
a societal problem (although caused by private
actions) and should therefore be amenable to a
social solution, the idea of such “social justice”
is not accepted by all.
Hayek, for example, states that “justice is
emphatically not a balancing of particular
interests at stake in a concrete case, or even of
the interests of determinable classes of persons,
nor does it aim at bringing about a particular
state of affairs which is regarded as just” (1976,
p. 39). Social justice, as used in modern
American society to refer to a redistribution of
the results of the working of the market economy
based on some idea of fairness or equality, is, for
Hayek, bordering on immoral. The market, he
believes, is a natural process, and the distribu-
tion of benefits that results from its workings is
not intended by particular individuals. “To
demand justice from such a process is clearly
107
absurd, and to single out some people in such a
society as entitled to a particular share evidently
unjust” (Hayek, 1976, p. 65). Hayek argues that
the current meaning of social justice came about
in part due to confusion in the meaning of the
terms “distributive justice” and “social justice”
in Mill’s work – where Mill states that “it is
universally considered just that each person
should obtain that (whether good or evil) which
he deserves; and unjust that he should obtain a
good, or be made to undergo an evil, which he
does not deserve” (Mill, 1861, p. 92). Hayek’s
distaste for the term “social justice” has appar-
ently to do with the fact that those who are
demanding such justice have no basis for the
demand (1976, p. 97), that in fact they do not
deserve the redistribution of benefits from
exchange that they are demanding. Going back
to Mill’s argument, such a demand would be
unjust. We agree. However, in the cases of
externalities and information asymmetries as
described above, it is clear that those who are
being burdened have a very good reason for
expecting a redistribution of that burden: they
have received no benefit.
In fact, many societies have decided that under
those conditions, society should, through
government, take action to ensure that those who
benefit, pay. The problem is one of compensa-
tion, and that is a distributional problem, to be
decided by politics (Boyce, 1995, p. 14). While
some philosophers (see Hayek, 1976; Nozick,
1974) would disagree that governments have the
moral right to intervene in the decisions and
results of the free market, other philosophers,
such as Rawls (1971) have put forward con-
vincing arguments as to why it is both moral and
necessary to do so. Economists, too, have argued
that under conditions where the market has failed
(such as externalities and information asymmetry)
the government has a role to play in correcting
the situation (Lipsey, 1997). In American society,
the moral principle that there should be a direct
relation between consumption and production
(without government intervention) (Gauthier,
1986) is strongly supported, but it is also the case
that, with appropriate justification, governments
are expected to intervene to promote a just
society (Milde, 1985).
108 Sandra L. Christensen and Brian Grinder
Justice and the stockowner
If it is unjust that those who have not benefited
from an exchange are forced to bear burdens as
a result of the exchange, and the society has
determined that it is a proper role of government
to attempt to correct the maldistribution of
burdens and benefits, the next question is, by
what means? In America, it has been, until
recently, the practice of the government to
intervene to overturn market effects through law
and regulation. In the environmental area, for
example, in order to overcome the tendency of
some firms to avoid paying the full costs of
disposition of their wastes, the government has
passed laws as to appropriate disposition, and
given the Environmental Protection Agency
(among other agencies) the authority to pro-
mulgate regulations to enforce the intent of those
laws. Such regulation has usually meant the
imposition of limits and standards on behavior
deemed detrimental to the environment (Leith,
1995). Such corrective solutions have been both
costly, in many cases ineffective, and in some
cases, counterproductive (Dooley and Lerner,
1994) in effecting change in the behavior of
business. As a result, the unjust externalities have
continued, and additional costs have been
imposed. Further, in an increasingly complex
business environment, law and regulation may be
harming the ability of business to compete in a
more global market environment.
One result of recognition of the costs, inef-
fectiveness, and competitive effects of regulation
has been a shift away from traditional regulation
towards the use of policy instruments (Leith,
1995) to achieve the goals of government
intervention in the market. Examples of the new
tools are emissions fees, user fees and product
charges, in the environmental policy area (Leith,
1995). These fees and taxes are meant to cause
firms to take inside the firm the previously social-
ized costs of environmental damage resulting
from doing business. To the extent that this
occurs, such policy tools reduce the injustice
caused by imposing the costs on parties other
than those contracting for the goods or services.
For example, had the government of Ecuador
been able to assess Texaco waste fees for the
discharge of their toxic wastes, the costs would
have been private rather than social in nature –
taken into the cost structure of the product and
reflected in the price of the goods. Had the fees
covered fully the costs now being borne by the
citizens of Ecuador, there would have been no
social costs attached to Texaco’s operations (at
least in this narrow example of toxic wastes). It
can be argued that the fee system would have
been, in that case, fully effective in achieving
social justice.
However, justice requires that benefits and
burdens be appropriately distributed among all
affected parties – all stakeholders. However just
it might seem to be to ask the customers of the
product to pay the full price of the externality,
the customer is not, in fact, the only stakeholder
to benefit from the exchange contract. Another
party to the contract, the stockowner, also
benefits from the transaction. Indeed, some
economists have argued that the sole responsi-
bility of the management of the business firm is
to benefit stockowners by increasing their wealth
(Friedman, 1970).
Some might argue that, because stockowners
do not control the assets of a business organiza-
tion, but only have rights to profits (see
Boatright, 1994; Christman, 1994; and Jensen
and Meckling, 1976, for discussions of this
distinction), they ought not be made to share in
the burdens of the decisions made on their behalf
by managers and directors. But, when benefits
are accepted, obligations of fairness are created
(Phillips, 1997). Stockowners do benefit as a
result of their rights to income, and so must fulfill
their obligations of fairness. The burdens of
justice should not fall solely on the customers (or
employees) of a business, but must be shared by
stockowners.
Berle and Means (1932) argued that when they
gave up control of the assets of the corporation,
stockowners made it possible for the community
to assert that the corporation has an obligation
to serve the community as well as its stock-
owners; in other words, made the corporation
subject to public policy. Some would go farther,
and assert that the array of “property rights,
liberties, and powers” that owners should have
over their goods is an issue of distributive justice
 Justice and Financial Market Allocation of the Social Costs of Business
to be decided by society (Christman, 1994,
p. 228). Indeed, the distribution of income rights
from property, according to Christman, is a
central part of public policy (1994, p. 249). In
furthering that philosophy, Schlossberger (1994)
distinguishes between opportunity capital and
specific capital. The latter is provided by stock-
owners, and the former is provided by society
in the form of infrastructure, knowledge base,
monetary system, and other general resources
provided by society without which business
could not be done. The greater the use by a
business of societal opportunity capital, the
stronger are its obligations to opportunity capital
investors (Schlossberger, 1994, p. 470). While we
recognize that corporations and stockowners do
contribute to opportunity capital as taxpayers,
it is clear that society has a basis for policy
interventions to ensure that the stockowner
obligation to fairly share the burden of social
costs is met. This is especially true when social
costs might otherwise fall solely on consumers
when taken into the firm, or on society if left
external to the firm.
There is some evidence that stockowners are
already bearing their share of the social cost
burden. Event studies of stock price reaction to
corporate illegal or irresponsible behavior have
shown a significant price reaction to news of such
behavior (Baucus and Baucus, 1997; Berman,
1997; Davidson and Worrell, 1988; Frooman,
1997; Reichert et al., 1996). On the basis of
these studies, it has been stated that the effect of
corporate wrong-doing on stockowner wealth is
significant and long-term (Frooman, 1997). In
fact, however, event studies normally review
the effect of the event for from ten to ninety
days after the event. When longer-term studies
are performed, these negative effects are shown
to be very short lived, with positive corrections
likely to follow quite soon after the events
(Berman, 1997). Baucus and Baucus (1997)
found no significant relationship between cor-
porate illegality and stockholder returns over a
five year period. While it is possible to postulate
that once the negative effect has occurred, stock-
owner returns will never recover their “normal”
rate, that has not been shown empirically. The
research to date would seem to indicate that
109
stockowners are not bearing their share of the
social cost burden.
Intervention through the capital markets
In 1978, Nobel Laureate economist James Tobin
proposed a transaction tax on foreign exchange
transactions that he thought might reduce
volatility in foreign exchange markets (Tobin,
1978). The “Tobin tax” would be a very small
percent of each transaction that would discourage
speculators and encourage long term investment.
While never adopted, the Tobin tax is now being
reconsidered as a policy instrument that might
have fewer negative market consequences than
regulation (Felix, 1995; ul Haq et al., 1996).
Those who argue against imposition of such a
tax appear to believe that it will not stop
speculation in foreign exchange markets, but
might have a negative impact on the flow of
trade (Davidson, 1997). Be that as it may, a Tobin
tax on stock transactions might be a means to
allocate the social cost burden to stockowners.
Michalos (1997) offers a good summary of
nineteen arguments in favor of a Tobin tax. He
also offers twenty different arguments against the
Tobin tax along with rebuttals that, according to
Michalos, “are sufficient to totally destroy or
seriously undermine their credibility” (1997,
p. 39).
A transaction tax on stock transfers of firms
or industries whose behavior has caused or can
be expected to cause social costs to be incurred
would serve a number of purposes. First, the tax
would shift some of the burden of the social costs
to the stockowner, thereby bringing about a
more just internal distribution of the burdens and
benefits of the operation of the business. Not
only the customer and employees of the firm
would be paying for the external effects of the
business, but the stockowner would be as well.
Those who received benefit would bear a portion
of the burden. Second, the tax would encourage
stockowners to monitor the firm’s management
more carefully. Should the tax be structured so
that it increased according to the number of
violations of law and regulation, it would be in
the interest of stockowners to quickly rid the
110 Sandra L. Christensen and Brian Grinder
firm of management that failed to act responsibly.
Third, the proceeds of such a tax could be
earmarked for particular purposes: to aid victims
of corporate irresponsibility, to educate con-
sumers about the product (and so correct infor-
mation asymmetries), or for other purposes as
decided through the political process. Finally, a
Tobin tax on stock transactions could operate as
a signal to stockowners and potential investors
that the firm or industry is in some way violating
the principles of justice. Such signaling might
encourage increased monitoring by investors of
firm behaviors and provide information as to firm
reputation. Stockowners are in a position to help
improve business behavior, but they are not likely
to do so unless their wealth is negatively affected
by that behavior (Davidson, Worrell, and El-Jelly,
1995). Imposition of a Tobin tax on stock trans-
actions could have a negative effect on wealth
through its signaling effect, and the probable
effect of the imposition of the tax on buyers of
the particular stock.
Had such a tax been imposed on Texaco when
it became known that the company was being
sued for toxic waste mismanagement in Ecuador,
or on Exxon when news of the Exxon-Valdez
disaster broke, stockowners who caused the
short-term negative price effect shown in event
studies would not have been able to exit the firm
without paying the penalty for their failure to
monitor firm behavior. (While it is true that
stockowners who sold their stock during the
short term period of price decline may have
paid a penalty, it is also possible that they had
previously garnered some price appreciation
resulting from the on-going socialization of third
party costs.) Had such a tax been levied on the
tobacco manufacturers when it first was known
that they were withholding crucial information
about the safety of their product, there would
now be a fund to cover some of the social costs
of that behavior, paid for by stockowners.
One question that would have to be consid-
ered if a Tobin tax on stock transactions were to
be added to the list of policy tools available to
achieve social justice in a market economy is how
to ensure that the stockowners who were
benefiting from the firm’s actions are the same
stockowners upon whom the burden of the tax
would be imposed. This could be achieved if the
tax was imposed on all stock transactions, but that
would impose a burden on stockowners of
companies who do not act irresponsibly as well.
The tax could be based on industry experience
ratings, much like state Departments of Labor
and Industry impose differential taxes on indus-
tries with higher rates of employee injury. In that
case, all stock transactions would be taxed at a
minimum level, but some industries with higher
probabilities of social costs would be taxed at a
higher level, and firms with higher than average
rates of violations could be taxed higher yet.
These are matters to be worked out by policy-
makers with an eye toward the just distribution
of the burden of such a tax.
Some countries, such as Sweden, already
impose taxes on stock transactions. Miller (1991)
notes some of the consequences of Sweden’s tax.
He states that the transactions tax has reduced the
liquidity of the stock market, decreased the
attractiveness of equity capital as a portfolio
investment by individuals, and decreased the
availability of equity capital as a source of funding
for companies (Miller, 1991, p. 104). If these
consequences were to follow from the imposi-
tion of a transactions tax in America, the effects
would be counter to justice to the extent that
they affected firms that were not contributing to
social costs. However, Miller notes that the tax
in Sweden (2% of the equity transaction
[Michalos, 1997]) is “heavy” (Miller, 1991, p.
104). A transactions tax to distribute the burden
of social costs to stockowners need not be large,
so the effect on market efficiency need not be
great. Also, given that commissions on stock
transactions have been reduced significantly due
to technological advances, the tax might not have
the severe consequences here that it did in
Sweden.
There are certainly alternative means that
could be used to bring about greater justice in
the distribution of social cost burdens of the
activities of private firms. Some revision of
property rights to more fully reflect the distinc-
tion between control and income rights might
be a possibility. “A new era will require new
property rights” (Barnes, 1999) is surely a true
statement. Forty two percent of the stock market
 Justice and Financial Market Allocation of the Social Costs of Business
gains in American between 1989 and 1997 went
to the top 1% of households, and those house-
holds hold nearly half of all financial assets
(Goozner, 1999).
Conclusion
This paper has provided a background of theories
of justice and economics that point to the con-
clusion that there is a lack of justice in the
internal and external distribution of the social
costs of doing business. The stockowners, who
have benefited from business transactions under-
taken by the companies they own, are not sharing
fairly in the burden of the social costs of those
transactions. Those costs are being borne dis-
proportionately by consumers, employees, and
society. We have proposed that a Tobin-like tax
on stock transactions might be a just means of
achieving greater justice in the distribution of the
social cost burden. We have noted that such a
tax, properly implemented, might also be less
costly and more effective in internalizing the
social costs of doing business than regulation.
Such a tax can be implemented without severe
disruptions to the market and it can be designed
in such a way so that the stockowners of
businesses that impose large social burdens on
society are taxed in proportion to the burden.
In contrast to possible alternative policy tools, the
Tobin tax would not place an unfair burden on
stockowners. In a just society, it seems fair to
ask the wealthy to take on a fair share of the
burdens that arise in pursuit of benefit.
Note
1
The Tobin tax, as originally proposed, is an inter-
national tax on foreign currency exchange transac-
tions (Tobin, 1978).
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Sandra L. Christensen
Eastern Washington University,
Department of Management,
668 N. Riverpoint Blvd., Suite A,
Spokane, WA 99202,
U.S.A.
E-mail: sandra.christensen@mail.ewu.edu
Brian Grinder
Eastern Washington University,
Department of Management,
MS-42,
Cheney, WA 99004,
U.S.A.
E-mail: brian.grinder@mail.ewu.edu