A Subsidy Inversely Related to the Product Price

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Abstract

This paper considers a new subsidy scheme for supporting the purchase of target products, in which the subsidy payment is inversely related to the product price. The scheme makes the demand faced by producers more elastic, thereby reducing their power to raise prices and increasing subsidy pass-through to consumers. Relative to the commonly-used specific or ad valorem subsidy, it induces larger sales with the same government budget (up to 50% more sales than the specific subsidy according to simulations based on the U.S. electric vehicle market) and allows the policy maker to flexibly adjust the incidence on producers.
Original languageEnglish
Place of PublicationAberdeen
PublisherUniversity of Aberdeen
Pages1-38
Number of pages38
Volume19
Publication statusPublished - Dec 2019

Publication series

NameDiscussion Papers in Economics and Finance
No.8
Volume19
ISSN (Electronic)0143-4543

Keywords

  • subsidy
  • efficiency
  • incidence
  • Bertrand competition
  • supermodular games

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  • Cite this

    Kiso, T. (2019). A Subsidy Inversely Related to the Product Price. (pp. 1-38). (Discussion Papers in Economics and Finance; Vol. 19, No. 8). University of Aberdeen.