The Impact of Consumer Subsidy on Green Technology Innovations for Vehicles and Environmental Impact

Abstract

In the pressure of excessive resource consumption and serious environmental pollution, governments provide various consumer subsidies to promote sales of energy-saving vehicles, including the energy-saving fuel vehicle (FV) and the pure electric vehicle (EV) in the automobile industry. Utilizing a Hotelling model, this paper explores two competing firms’ decisions on the selection of green technology innovations for vehicles, namely producing either the energy-saving FV or the pure EV, while the two vehicles are different from each other on not only the energy-saving level but also the consumer’s acceptance. We further explore the impact of the government’s consumer subsidy on the profits, environment, and consumer surplus. We find that the two competing firms’ equilibrium selections of green technology innovations for vehicles change as the variable manufacturing cost of the pure EV varies. In particular, when the variable manufacturing cost of the pure EV is moderate, the firm with a lower technology capacity for improving the energy-saving level of the FV (i.e., firm 2) will produce the pure EV while the other firm (i.e., firm 1) produces the energy-saving FV, and the converse is not true. In this case, the decreasing variable manufacturing cost of the pure EV will benefit firm 2 and make firm 1 lose in a competing context. In particular, both firms would charge lower retail prices as the variable manufacturing cost of the EV decreases. In addition, we find that although the consumer subsidy could reduce the purchasing cost for the consumer and promote both firms to produce higher energy-saving level vehicles, a firm can still reduce its retail price under certain conditions because of the competition between the two firms. Finally, we prove that the consumer subsidy can be always beneficial to the environment, while it may hurt the consumer surplus and the firms’ profits under certain conditions. The results provide suggestions for governments to adopt an appropriate consumer subsidy program from perspectives of the consumer, environment, and economy.

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