Experimental tests of system of governmental subsidies for sustainable production.

Paper in proceeding, 2005

A multi-trial duopoly price-setting game was used to investigate the potential ef-fectiveness of a governmental subsidy system to reduce sales and therefore pro-duction of environmentally harmful products. Two levels of a subsidy for unsold units were compared with a control condition without a subsidy. The results showed that the subsidies did not prevent competition but nevertheless led to the setting of higher prices that resulted in fewer sales. In the control condition a price war led to decreasing prices and increasing sales. The ways in which the proposed subsidy system may be implemented in the transport sector and other sectors are discussed. Specifically, it is proposed that the subsidy system may complement the newly introduced European Emission Trading Scheme