Impact of government subsidy on agricultural production and pollution: A game-theoretic approach

To deal with serious environmental problems in agriculture, governments around the world have formulated various subsidy policies. This study aims to investigate the effects of three subsidy schemes using game theory in an agricultural supply chain consisting of a low-cost firm and a high-cost firm. Meanwhile, the cost factor, market structure, product differentiation, and competition are all incorporated in the model as a novel contribution. The results show that neither the output quantity subsidy nor the environmental innovation subsidy alone can resolve the conflict between agricultural development and environmental protection. Furthermore, a hybrid subsidy scheme combining these two unilateral subsidies can reduce pollution emissions, increase output, improve firms' profits, and enhance consumer surplus, which is a truly effective and viable solution. The government who adopts the hybrid subsidy scheme should set a not too high subsidy rate to achieve maximal social welfare, which helps achieve a win-win-win situation for the government, consumers, and firms. Besides, market structure has no impact on the effectiveness of subsidy schemes. (C) 2020 Elsevier Ltd. All rights reserved.