Price Subsidies Versus R&D Subsidies for Energy-Efficient Products

In a duopoly with the firms supplying a product of differing energy efficiency, we analyze the effect of consumer price subsidies and compare it with that of direct R&D subsidies. We note that price subsidies and direct R&D subsidies of equal rates provide identical incentives for R&D investment. If the efficiency differential of the two products is large, to maximize social welfare, the government should subsidize both products or neither products under the two forms of subsidy. When the social cost of public funds is taken into account, subsidizing R&D directly results in a higher level of social welfare than subsidizing consumption.