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A Class Of Performance-Based Subsidy Rules

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  • Hassan Benchekroun

    ()

  • Ngo Van Long

    ()

Abstract

We consider a benchmark static incentive scheme, i.e. a per unit subsidy, that induces a monopoly to produce a target output level. We show that the same output level can be achieved by a continuum of dynamic subsidy rules based on a performance indicator. The subsidy rules require only local information. The present value of the subsidies paid under anyone of our dynamic schemes is smaller than the amount paid under the static subsidy. Moreover, each of the dynamic subsidy rules results, at each moment, in a lower per unit subsidy than the static subsidy. The subsidy rate depends on a state variable that reflects the monopolist's history of performance. This variable depreciates over time, therefore requiring a permanent effort of the monopolist to maintain it at an optimal level. In an example with a linear demand, the subsidy costs of inducing efficiency are reduced by almost fifty per cent.We show that the cost of sorting and the network effects jointly determine the rate of participation of consumers in the process of recycling. The dominant producer of virgin material takes into account the recycling activities when it makes its pricing decision. The network effects can create multiplicity of steady-state equilibria. The government can improve welfare by influencing equilibrium selection.

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Bibliographic Info

Paper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2007-05.

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Length: 25 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:mcl:mclwop:2007-05

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  1. Guesnerie Roger & Laffont Jean-jacques, 1978. "Taxing price makers," CEPREMAP Working Papers (Couverture Orange) 7806, CEPREMAP.
  2. Hassan Benchekroun & Ngo Van Long, 1997. "Efficiency Inducing Taxation for Polluting Oligopolists," CIRANO Working Papers 97s-21, CIRANO.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  4. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-98, April.
  5. Ngo Van Long & Antoine Soubeyran, 2002. "Selective Penalization Of Polluters: An Inf-Convolution Approach," CIRANO Working Papers 2002s-40, CIRANO.
  6. Schwermer, Sylvia, 1994. "Regulating Oligopolistic Industries: A Generalized Incentive Scheme," Journal of Regulatory Economics, Springer, vol. 6(1), pages 97-108, February.
  7. Karp, L., 1992. "Depreciation erodes the coase conjecture," Discussion Paper Series In Economics And Econometrics 9210, Economics Division, School of Social Sciences, University of Southampton.
  8. David P. Baron & Roger B. Myerson, 1979. "Regulating a Monopolist with Unknown Costs," Discussion Papers 412, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521337465, October.
  10. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
  11. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
  12. Rees, R. & Vickers, J., 1991. "RPI-X Price Cap Regulation," Working Papers 1992-01, University of Guelph, Department of Economics and Finance.
  13. Malueg, David A & Solow, John L, 1989. "A Note on Welfare in the Durable-Goods Monopoly," Economica, London School of Economics and Political Science, vol. 56(224), pages 523-27, November.
  14. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, October.
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Cited by:
  1. Daubanes, Julien, 2011. "Optimal taxation of a monopolistic extractor: Are subsidies necessary?," Energy Economics, Elsevier, vol. 33(3), pages 399-403, May.
  2. Ngo Long, 2011. "Dynamic Games in the Economics of Natural Resources: A Survey," Dynamic Games and Applications, Springer, vol. 1(1), pages 115-148, March.

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