Energy efficiency subsidies with price-quality discrimination

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

No 2015.11, Working Papers from FAERE - French Association of Environmental and Resource Economists

Abstract: We compare a range of energy efficiency policies in a durable good market subject to both energy-use externalities and price-quality discrimination by a monopolist. We find that the social optimum can be achieved with differentiated subsidies. With ad valorem subsidies, the subsidization of the high-end good leads the monopolist to cut the quality of the low-end good. The rates should always be decreasing in energy efficiency. With per-quality subsidies, there are no such interference and the rates can be increasing if the externality is large enough relative to the market share of low-type consumers. Stand-alone instruments only achieve second-best outcomes. A minimum quality standard may be set at the high-end of the product line if consumers are not too dissimilar, otherwise it should only target the low-end good. An energy tax should be set above the marginal external cost. Likewise, a uniform ad valorem subsidy should be set above the subsidy that would be needed to spec ifically internalize energy-use externalities. Lastly, if, as is often observed in practice, only the high-end good is to be incentivized, a per-quality schedule should be preferred over an ad valorem one. An ad valorem tax on the high-end good may even be preferred over an ad valorem subsidy if the externality is small enough and low-end consumers dominate the market.

Keywords: energy efficiency; price-quality discrimination; imperfect discrimination; vertical differentiation; subsidy (search for similar items in EconPapers)
JEL-codes: H23 Q48 Q54 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015-06
New Economics Papers: this item is included in nep-com, nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published in Energy Economics 52(S1), S53-62.

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http://faere.fr/pub/WorkingPapers/Nauleau_Giraudet_Quirion_FAERE_WP2015.11.pdf First version, 2015 (application/pdf)

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Journal Article: Energy efficiency subsidies with price-quality discrimination (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:fae:wpaper:2015.11

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