A Subsidy That Is Inversely Related to the Product Price

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Abstract

This study considers a new subsidy design to support the purchase or production of target products. Under the proposed design, subsidy payments are inversely related to product prices. Compared to ‘flat’ subsidies, this design reduces producers’ market power and the subsidy benefits passed on to them, improving the cost-effectiveness of government spending (by up to 50% according to simulations based on an actual subsidy programme). Additionally, this subsidy’s cost-effectiveness and incidence can be adjusted flexibly by changing the policy parameters. Finally, the subsidy design can be modified to provide larger payments to higher-quality products, thereby offsetting disincentives for quality improvement.
Original languageEnglish
PublisherUniversity of Aberdeen
Pages1-49
Number of pages49
Volume21
Publication statusPublished - 9 Sep 2021

Publication series

NameDiscussion Papers in Economics and Finance
No.2
Volume21
ISSN (Electronic)0143-4543

Keywords

  • IR subsidy
  • Cost-Effectiveness
  • Incidence
  • imperfect competition
  • supermodular games

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