Abstract
Abstract This study considers a new subsidy design to support the purchase or production of target products. Under the proposed design, subsidy payments are inversely related to product prices. Compared to ‘flat’ subsidies, this design reduces producers’ market power and the subsidy benefits passed on to them, improving the cost-effectiveness of government spending (by up to 50% according to simulations based on an actual subsidy programme). Additionally, this subsidy’s cost-effectiveness and incidence can be adjusted flexibly by changing the policy parameters. Finally, the subsidy design can be modified to provide larger payments to higher-quality products, thereby offsetting disincentives for quality improvement.
Highlights
Many subsidy programmes in various countries aim to promote the purchase or production of target goods for such reasons as positive externalities, merit-good characteristics, and distributional concerns
This study proposes a new subsidy form to be used in programmes supporting the purchase or production of target goods
Simulation 1, shown in the left column, is sales neutral: the three subsidy schemes are all designed to induce the equilibrium price and sales targeted by the government (i.e. p = $26, 660 in the low-quality, low-cost case or p = $31, 299 in the high-quality, high-cost case, and q ≡ D (p, p) = 50, 981/n)
Summary
Many subsidy programmes in various countries aim to promote the purchase or production of target goods for such reasons as positive externalities, merit-good characteristics, and distributional concerns. These programmes partially offset the purchase or production costs of these goods through financial incentives offered to consumers or producers, such as grants, rebates, and tax credits or deductions. Some subsidies use a mixture of the two forms (e.g. an ad valorem subsidy with a cap, as in reference pricing for pharmaceuticals). This study proposes a new subsidy form to be used in programmes supporting the purchase or production of target goods. Simulations based on an actual EV subsidy in the US indicate that switching from the current specific subsidy to the proposed form would increase the market sales by up to 50%, holding total government spending on the programme constant
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
