This paper analyses alternative subsidy schemes and long-run entry bias in a new industry that creates positive environmental externalities (both generation externalities and externalities associated with interindustry technology spillovers). It demonstrates that per-unit subsidy scheme, despite attracting fewer firms, results in higher industry output and economic surplus in the equilibrium compared with the expenditure equivalent lump-sum subsidy scheme. However, the later leads to higher total surplus, unless spillover externalities are sufficiently small. Further, the free-entry equilibrium number of firms may be excessive or insufficient. A key finding of this paper is that the first-best equilibrium outcome can be implemented through a unique combination of per-unit subsidy and lump-sum subsidy/tax, which involves positive government expenditure in the presence of positive externalities.

Externalities, entry bias, and optimal subsidy policy for cleaner environment / Pal, R.; Scrimitore, M.; Song, R.. - In: JOURNAL OF PUBLIC ECONOMIC THEORY. - ISSN 1097-3923. - 25:1(2023), pp. 90-122. [10.1111/jpet.12612]

Externalities, entry bias, and optimal subsidy policy for cleaner environment

Scrimitore M.;
2023-01-01

Abstract

This paper analyses alternative subsidy schemes and long-run entry bias in a new industry that creates positive environmental externalities (both generation externalities and externalities associated with interindustry technology spillovers). It demonstrates that per-unit subsidy scheme, despite attracting fewer firms, results in higher industry output and economic surplus in the equilibrium compared with the expenditure equivalent lump-sum subsidy scheme. However, the later leads to higher total surplus, unless spillover externalities are sufficiently small. Further, the free-entry equilibrium number of firms may be excessive or insufficient. A key finding of this paper is that the first-best equilibrium outcome can be implemented through a unique combination of per-unit subsidy and lump-sum subsidy/tax, which involves positive government expenditure in the presence of positive externalities.
2023
Imperfect Competition; Idle Capacity; Barriers
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/20.500.12318/153606
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