Strategic price subsidies for new technologies

Abstract

In the literature, the study of price subsidies of new technologies has focused on the tactical problem of achieving maximum penetration under a budget constraint over a short horizon. In practice, such tactical, short-term penetration objectives seem both to adequately reflect the structure of many price subsidy programs (e.g., solar energy), and account for their high failure rate. The present paper goes beyond determining optimal price and subsidy paths under a budget constraint and focuses on strategic decision making. A generic strategic objective of price subsidies is to make a product or technology competitive at an earlier point in the future than would otherwise be possible. This begs the natural question of feasibility. While determining feasibility, we derive detailed price and subsidy paths and the government budget required. Then, we can iteratively determine the program that maximizes welfare.