Cost subsidy or environmental regulation? The effects of government interventions on environmental quality and 3BL performance

Abstract

Green product development and innovation play a crucial role in addressing environmental issues. Governments often promote innovation by motivating manufacturers to enhance their products' environmental qualities (i.e., greenness, energy efficiency, recyclability). This paper investigates the implications of cost subsidy and environmental regulation for manufacturers’ pricing and environmental quality decisions, and triple-bottom-line (3BL) performance. We develop theoretical models involving one social welfare-maximizing government and one or two manufacturers. In the monopoly model, environmental regulation can achieve the same level of social welfare and environmental performance as cost subsidy when consumers have low environmental awareness. In the competitive model, market scale asymmetry between manufacturers drives differences in product price and environmental quality. Specifically, the manufacturer with a larger market share is also the leader in environmental quality and profit. Furthermore, cost subsidy and environmental regulation have distinct effects on environmental quality competition. A higher subsidy rate widens the gap between environmental qualities, helping competing manufacturers better differentiate their products. Conversely, a stricter regulatory standard narrows the gap between environmental qualities, hindering product differentiation. Moreover, numerical analysis shows that the dominating policy in the competitive model depends on environmental and market characteristics. Finally, we check the robustness of the results by considering two extensions of our models and find that the main insights remain valid.