The Effect of Government Support on Green Product Design and Environmental Impact

Abstract

We study competing fi rms' green product design decisions, and the effect of two common types of government support, namely R&D support and sales subsidies, on the products, firms and the resulting impact. Each fi rm produces a product that contains a traditional quality and an environmental quality according to corresponding technology capabilities of the firm and market competition. Our main results are as follows. First, we show that fi rms will produce greener products and charge higher prices when they embrace greater technology capabilities related to production of the quality, or when consumers become more conscious of the impact. Second, we find that although both the government R&D support and sales subsidies prompt fi rms to produce greener products, the overall impact is mixed. Specifi cally, while sales subsidies generally lead to positive benefi ts, R&D support can have an unanticipated negative overall impact on the environment. Third, we show that fi rms do not always benefi t from either type of the government support.