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A Class Of Performance-Based Subsidy Rules

  • Hassan Benchekroun

    ()

  • Ngo Van Long

    ()

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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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. Karp, Larry, 1995. "Depreciation Erodes the Coase Conjecture," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt1fs6j5nn, Department of Agricultural & Resource Economics, UC Berkeley.
  2. 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.
  3. Guesnerie Roger & Laffont Jean-jacques, 1978. "Taxing price makers," CEPREMAP Working Papers (Couverture Orange) 7806, CEPREMAP.
  4. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586, Junio.
  5. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. 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.
  7. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
  8. Hassan Benchekroun & Ngo Van Long, 1997. "Efficiency Inducing Taxation for Polluting Oligopolists," CIRANO Working Papers 97s-21, CIRANO.
  9. Rees, R. & Vickers, J., 1991. "RPI-X Price Cap Regulation," Working Papers 1992-01, University of Guelph, Department of Economics and Finance.
  10. Ngo Van Long & Antoine Soubeyran, 2002. "Selective Penalization Of Polluters: An Inf-Convolution Approach," CIRANO Working Papers 2002s-40, CIRANO.
  11. Schwermer, Sylvia, 1994. "Regulating Oligopolistic Industries: A Generalized Incentive Scheme," Journal of Regulatory Economics, Springer, vol. 6(1), pages 97-108, February.
  12. 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.
  13. 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.
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