The Impact of Demand Uncertainty on Consumer Subsidies for Green Technology Adoption

Abstract

This paper studies government subsidies for green technology adoption while considering the manufacturing industry's response. Government subsidies offered directly to consumers impact the supplier's production and pricing decisions. Our analysis expands the current understanding of the price-setting newsvendor model, incorporating the external influence from the government who is now an additional player in the system. We quantify how demand uncertainty impacts the various players (government, industry and consumers) when designing policies. We further show that for convex demand functions, an increase in demand uncertainty leads to higher production quantities and lower prices, resulting in lower profits for the supplier. With this in mind, one could expect consumer surplus to increase with uncertainty. In fact, we show this is not always the case and the uncertainty impact on consumer surplus depends on the trade-off between lower prices and the possibility of under-serving customers with high valuations. We also show that when policy makers such as governments ignore demand uncertainty when designing consumer subsidies, they can significantly miss the desired adoption target level. From a coordination perspective, we demonstrate that the decentralized decisions are also optimal for a central planner managing jointly the supplier and the government. As a result, subsidies provide a coordination mechanism.

Donor Product‐Subsidies to Increase Consumption: Implications of Consumer Awareness and Profit‐Maximizing Intermediaries

“…() extend Cohen et al. () and show that the subsidy‐designer should commit to the subsidy level in advance. Taylor and Xiao (), Raz and Ovchinnikov () and Berenguer et al.…”

Harnessing frugal innovation to foster clean technologies

“…Even worse is that government subsidies are still usually not sufficient enough to maintain the initial development of clean technologies. Scholars have found that governments, due to ignorance of demand uncertainty on the consumer side, often make subsidies too low for new cleantech products to kick-start and survive (Cohen et al 2015). They thus call for a more sensible subsidy policy to boost sales of new cleantech products to reach the desired adoption target level.…”

“…However, the higher price of clean technologies (Pode 2010;Khorasanizadeh et al 2015) and green products (Chen and Chai 2010;Janssen and Jager 2002) often increases the cost for users and thus creates a barrier for adoption of the technology (Beck and Martinot 2004;Janssen and Jager 2002;Shamdasani et al 1993). Under such circumstances, government subsidies have become essential to supporting and sustaining the development of clean technologies and related green products (Beck and Martinot 2004;Cohen et al 2015).…”

Life-cycle private-cost-based competitiveness analysis of electric vehicles in China considering the intangible cost of traffic policies

“…Analysis results indicate that, for consumers, EVs do not currently represent a cost-effective mobility option compared to CVs [8,15]. However, policies play a key role in EV penetration; therefore, the impact of government subsidies has been widely discussed [16,17]. Zhao et al [11] indicated that the LCC of BEVs with central government subsidies is approximately 1.4 times higher than that of comparable CVs, and it is forecasted that BEVs without subsidies likely will not be competitive in China's market before 2031.…”