Manufacturer vs. Consumer Subsidy with Green Technology Investment and Environmental Concern

Abstract This paper analyzes the effect of environmental subsidies on the incentives of investing in emission-reducing technologies in manufacturing amid the environmental concerns of consumers. The study adopts a game theoretical approach with respect to the interactions of environmental subsidy policies, emissions abatement and other decisions between the government and manufacturer(s). We examine and compare two environmental subsidy policies, namely, consumer and manufacturer subsidies, and find that the former yields a lower abatement and higher consumption quantity than the latter by focusing on consumption quantity instead of production emissions abatement. The manufacturer takes advantage of the consumer subsidy to increase its profits by increasing its production quantity and setting a high price simultaneously. We also show that the manufacturer's practice of taking advantage of the consumer subsidy presents a higher financial burden for the government than under the manufacturer subsidy. Besides, the consumer subsidy results in higher net emissions than the manufacturer subsidy due to the larger production quantity and lower abatement level under this policy. Despite the result of higher emissions, the consumer subsidy generates a higher social welfare compared to the manufacturer subsidy given that the former can lead to a larger quantity supply and profit for the manufacturer. We also extend the base model to multiple other cases to check the robustness of our results and find that our main results still hold qualitatively in these extensions.