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Technology Diffusion, Product Differentiation and Environmental Subsidies

Author

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  • McGinty Matthew

    () (University of Wisconsin-Milwaukee)

  • de Vries Frans P

    () (University of Stirling)

Abstract

This paper explores the relationship between environmental subsidies, the diffusion of a clean technology, and the degree of product differentiation in an imperfectly competitive market. Like others, we show that the subsidy succeeds in reducing environmental damage only when the substitution effect (the reduction in pollution associated with the clean technology) exceeds the output effect (the extent that the subsidy increases output). Here, we add product differentiation and diffusion dynamics. When the substitution effect dominates, environmental damage decreases monotonically during the diffusion process. The extent of technology diffusion (the degree to which clean technology replaces dirty) is decreasing in the degree of product differentiation. Further, as products become closer substitutes, it is more likely that the subsidy will reduce environmental damage. Finally, the subsidy for clean technology will spill over to the remaining dirty producers, increasing their profit as well. In a free-entry equilibrium, the subsidy decreases pollution when product differentiation is low compared to the relative pollution intensity of the clean technology.

Suggested Citation

  • McGinty Matthew & de Vries Frans P, 2009. "Technology Diffusion, Product Differentiation and Environmental Subsidies," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-27, March.
  • Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:11
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    References listed on IDEAS

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    1. Jennifer F. Reinganum, 1981. "Market Structure and the Diffusion of New Technology," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 618-624, Autumn.
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    3. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    4. Bansal, Sangeeta & Gangopadhyay, Shubhashis, 2003. "Tax/subsidy policies in the presence of environmentally aware consumers," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 333-355, March.
    5. Daniel Friedman, 1998. "On economic applications of evolutionary game theory," Journal of Evolutionary Economics, Springer, vol. 8(1), pages 15-43.
    6. Requate, Till & Unold, Wolfram, 2003. "Environmental policy incentives to adopt advanced abatement technology:: Will the true ranking please stand up?," European Economic Review, Elsevier, vol. 47(1), pages 125-146, February.
    7. Jaffe, Adam B. & Stavins, Robert N., 1994. "The energy paradox and the diffusion of conservation technology," Resource and Energy Economics, Elsevier, vol. 16(2), pages 91-122, May.
    8. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
    9. Konstantinos Giannakas & Amalia Yiannaka, 2008. "Market and Welfare Effects of Second-Generation, Consumer-Oriented GM Products," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(1), pages 152-171.
    10. Samaniego, Roberto M., 2006. "Industrial subsidies and technology adoption in general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1589-1614.
    11. Stoneman, Paul & Diederen, Paul, 1994. "Technology Diffusion and Public Policy," Economic Journal, Royal Economic Society, vol. 104(425), pages 918-930, July.
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