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The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones

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  • Fan, Ying
  • Zhang, Ge

Abstract

Subsidies to consumers may cause firms to charge higher prices, which offsets consumer benefits from subsidies. We study a subsidy program design that mitigates such price increases by making products' eligibility for a subsidy dependent on firms' commitment to price ceilings. To quantify the importance of such competition for eligibility, we develop a structural model and an estimation procedure that accommodate binding pricing constraints. We find that competition for eligibility mitigates the price increases arising from the subsidy and even leads to a reduction in prices for some products. It improves consumer and total surpluses while limiting government subsidy payments.

Suggested Citation

  • Fan, Ying & Zhang, Ge, 2021. "The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones," CEPR Discussion Papers 16033, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16033
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    Cited by:

    1. Lohawala, Nafisa, 2023. "Roadblock or Accelerator? The Effect of Electric Vehicle Subsidy Elimination," RFF Working Paper Series 23-13, Resources for the Future.

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    More about this item

    Keywords

    Subsidy; Price ceiling; Competition for eligibility; Cell phone;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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