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Optimal price subsidies under uncertainty

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  • Barbosa, Luciana
  • Rodrigues, Artur
  • Sardinha, Alberto

Abstract

This paper analyzes the effects of three finite-lived subsidies (fixed price, fixed premium, and minimum price guarantee policies) on investment timing and social welfare. We show how these policies can eliminate the under-investment inefficiency when considering a generic demand function with an exogenous multiplicative shock. We highlight the importance of optimally setting subsidy levels depending on the exogenous shock and demand function parameters. We thus analyze these subsidies and the main findings are threefold. First, the optimal premium subsidy is independent of the exogenous shock. Second, the optimal fixed price subsidy is affected only by uncertainty. Lastly, the optimal minimum price guarantee changes with the drift rate and volatility.

Suggested Citation

  • Barbosa, Luciana & Rodrigues, Artur & Sardinha, Alberto, 2022. "Optimal price subsidies under uncertainty," European Journal of Operational Research, Elsevier, vol. 303(1), pages 471-479.
    • Handle: RePEc:eee:ejores:v:303:y:2022:i:1:p:471-479
    DOI: 10.1016/j.ejor.2022.02.024
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    More about this item

    Keywords

    Investment analysis; Real options; Government subsidies; Social welfare;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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