Experimental simulations of a subsidy system for sustainable production

Report, 2005

A multi-trial duopoly price-setting experiment was conducted to investigate the potential effectiveness of a governmental subsidy system aimed to reduce sales and therefore production of environmentally harmful products. Two levels of a subsidy for unsold units were compared with a control condition without a sub-sidy. The results showed that the subsidies did not erode competition but never-theless led to the setting of higher prices that resulted in fewer sales. In the con-trol 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 sec-tor and other sectors are discussed. Specifically, it is proposed that the subsidy system may complement the newly introduced European Emission Trading Scheme.