A Class Of Performance-Based Subsidy Rules
AbstractWe 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 InfoPaper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2007-05.
Length: 25 pages
Date of creation: May 2007
Date of revision:
Other versions of this item:
- Hassan Benchekroun & Ngo Van Long, 2004. "Designing a Performance Indicator to Economize on Monopoly Subsidy," CIRANO Working Papers 2004s-08, CIRANO.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- L5 - Industrial Organization - - Regulation and Industrial Policy
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