Comparison of energy efficiency subsidies under market power

Energy efficiency subsidies are very popular all over the world for energy conservation and emission reduction. By using a game theory model, this article captures the differences of two important types of subsidies: fixed subsides and output subsidies. Some interesting conclusions are achieved, and some social phenomena are rationally explained. Firstly, increasing total subsidies increases the number of subsidized firms. Moreover, fiercer competition produces more firms to be subsidized. Thus, the number of subsidized firms depends on the competition in this industry. Secondly, output subsidies achieve a higher consumer surplus and a lower producer surplus than do fixed subsidies. Therefore, consumers like output subsidies, while firms like fixed subsidies. Finally, output subsidies achieve a more favorable environmental impact and subsidize more firms than do fixed subsidies. That is, the environmental effects of output subsidies dominate those of fixed subsidies. In summary, based on both the effects on the environment and the consumer surplus, this article supports output subsidies and explains the advantages of output subsidies.