Government subsidies for green technology development under uncertainty

Abstract

We investigate the government’s subsidy design problem for firms’ green technology development in an evolving industry and the subsidy’s impact on environment and social welfare. Without subsidy, social welfare may either increase or decrease as more firms enter the industry over time, depending on the environmental benefit of the green technology. However, when the government provides a subsidy for green technology development, social welfare is always improved as the industry evolves. Furthermore, the optimal subsidy level is not affected by the firms’ technological efficiency. Interestingly, if the government only considers the environmental benefits of the technology and its costs, the subsidy policy may be detrimental to the environment, compared to the case where social welfare is considered for decision making. We derive further insights into the government’s subsidy policy, and its role in firms’ technology development decisions, and social welfare under different industry environments.