Output subsidies in mixed oligopoly with research spillovers

Output subsidies have been proposed as a policy to rectify inefficiencies in mixed markets with public and private firms. This paper adds to the literature on mixed oligopolies by examining the behavior of firms, with research spillovers, and the government subsidizes output. A key finding is that output subsidies, unlike R&D subsidies, do not necessarily attain efficient resource allocation. Output subsidies are justified only at relatively low R&D spillovers. The rankings of optimal output subsidies, output and profits under alternate scenarios are significantly affected by spillovers. Social welfare ranking, on the other hand, is independent of spillovers, and welfare is largest under R&D competition.