Staying Competitive While Subsidized: A Governmental Policy to Reduce Production of Environmentally Harmful Products

Abstract

A price-setting experiment was conducted to investigate whether a proposed governmental subsidy system to reduce sales and production of environmentally harmful products would maintain competition, as required by EU regulations. Dyads of participants played the role of producers, independently setting unit prices for their products in a sequence of trials with feedback. In experimental conditions a subsidy was paid for unsold units, a system which had previously been found to raise prices and reduce the number of units sold. For half of the dyads in each condition the payoffs were individual, in the other half they were split equally to motivate cooperation. Substantiating that the subsidy did not eliminate competition, the prices were set lower and incomes were lower when the payoffs were individual than when they were split equally. The participants also adjusted their prices to increase their own payoff, taking into account the prices set by the others when the payoffs were individual—which they did not when the payoffs were split equally. The results support the claim that the proposed subsidy system is effective in raising prices so that sales and production of environmentally harmful products can be reduced without eliminating competition.