Environmental subsidy and the choice of green technology in the presence of green consumers

In this paper, we present a study on a government using subsidy policy to motivate firms' adoption of green emissions-reducing technology when consumers are environmentally discerning. We consider two profit-maximizing firms selling two products in a price and pollution sensitive market. The products differ only in their manufacturing costs, selling prices and the amount of pollutant emissions per unit of product. The objective of each firm is to determine the selling prices of the products, taking into account the impact of green technology on costs and customer demands. Two cases are considered: (1) the government has limited budget and can choose only one firm at most to provide subsidy; (2) the government has sufficient budget and can choose both firms to provide subsidy. We discuss which firm should be selected in each case and in which situation the firm has incentive to invest in the green technology. We also show that the green technology level, environmental improvement coefficient and unit cost increase coefficient play important roles in the government subsidy strategy.