Energy efficiency subsidies with price-quality discrimination

Marie-Laure Nauleau, Louis-Gaëtan Giraudet and Philippe Quirion

Energy Economics, 2015, vol. 52, issue S1, S53-S62

Abstract: We compare various designs of energy efficiency subsidies in a market subject to both energy-use externalities and price-quality discrimination by a monopolist. We find that differentiated subsidies can establish the social optimum. Unlike per-quality regimes, ad valorem regimes generate downstream interferences: Subsidising of the high-end good leads the monopolist to reduce the quality of the low-end good. For this reason, ad valorem differentiated rates should always decrease with energy efficiency, a result seemingly at odds with actual practice. In contrast, with per-quality differentiated subsidies, the rates can increase if the externality is large enough relative to the market share of “low” type consumers. Contrary to differentiated subsidies, what we shall call single-instrument subsidies only achieve second-best outcomes. A uniform ad valorem subsidy should have a rate higher than that needed to specifically internalise energy-use externalities. Lastly, if, as is often observed in practice, only the high-end good is to be incentivised, a per-quality regime should be preferred to an ad valorem one. An ad valorem tax on the high-end good may even be preferred to an ad valorem subsidy if the externality is small enough and low-end consumers dominate the market.

Keywords: Energy efficiency subsidies; Price-quality discrimination; Ad valorem incentive; Per-quality incentive; Energy efficiency gap; Energy-use externalities (search for similar items in EconPapers)
JEL-codes: D42 D62 H23 Q48 Q58 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Working Paper: Energy efficiency subsidies with price-quality discrimination (2018)
Working Paper: Energy efficiency subsidies with price-quality discrimination (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:52:y:2015:i:s1:p:s53-s62

DOI: 10.1016/j.eneco.2015.08.024

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