A Subsidy Inversely Related to the Product Price

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Abstract

This paper proposes a new subsidy scheme for promoting a target good’s consumption, where subsidy payment is inversely related to the good’s price. Under imperfect competition, this scheme makes the demand faced by producers more elastic, thereby reducing their power to raise prices and increasing subsidy pass-through to consumers. Compared to commonly-used specific or ad valorem subsidies, it can lower government expenditure for inducing a given output, and flexibly adjust the incidence on producers. Simulations based on an actual U.S. subsidy programme on electric vehicles indicate up to 50–81% reductions in government spending if it replaces the current specific subsidy.
Original languageEnglish
PublisherUniversity of Aberdeen Business School
Number of pages31
Publication statusSubmitted - 2018

Publication series

NameDiscussion Papers in Economics and Finance
PublisherUniversity of Aberdeen Business School
No.9
Volume18
ISSN (Electronic)0143-4543

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Keywords

  • Subsidy efficiency
  • Subsidy incidence
  • Imperfect competition
  • Cournot oligopoly
  • Electric vehicles

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Kiso, T. (2018). A Subsidy Inversely Related to the Product Price. (Discussion Papers in Economics and Finance; Vol. 18, No. 9). University of Aberdeen Business School.