A Subsidy Inversely Related to the Product Price

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.