Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/323232 
Year of Publication: 
2025
Series/Report no.: 
DICE Discussion Paper No. 425
Publisher: 
Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE), Düsseldorf
Abstract: 
We analyze the equilibrium effects of different subsidies on target goods under both perfectly competitive and monopolistic market structures. We concentrate our analysis on three particularly common forms of subsidies: (i) a per-unit subsidy, (ii) an ad valorem subsidy, and (iii) an "inversely related" subsidy, which increases as the price of the target good decreases. To evaluate the price effects of the subsidies, we rely on two criteria, an "equal-relief" criterion-which relies on a pass-through analysis-and a cost-effectiveness criterion. Overall, the ad valorem subsidy always yields the strongest price-increasing effect, whereas an inversely related subsidy leads to the lowest price increase. Consequently, the ad valorem subsidy induces the largest output expansion under perfect competition, whereas the inversely related subsidy dominates the other subsidies in a monopoly under both criteria. Those findings are consistent with several empirical facts, such as observed price differences for green target goods across European countries.
Subjects: 
Subsidies
Target Goods
Equal-relief
Pass Through
Cost Effectiveness
JEL: 
D04
D40
H20
ISBN: 
978-3-86304-424-4
Document Type: 
Working Paper

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