Technology Replacement Induced by Government Subsidy

Vournas, Stylianos ; Lorentziadis, Panos (1997-08)

Working Paper

Governments are expected to subsidy activities that would improve environmental conditions. In this respect, subsidies promoting the spread of new environment friendly technology are in effect in most parts of the world. In urban areas, automobile exhaustion gases is a major source of air pollution. Technological efforts aim to either reduce the pollution effect of gasoline or to develop alternative energy sources. As an example, in the early nineties, the Greek Government offered significant tax reduction for the acquisition of new automobiles that use unleaded gas. The favorable tax treatment benefited only those who would withdraw from circulation their old leaded-gasoline car. As a result, the number of old (conventional technology) cars was drastically reduced. In the future, tax incentives and/or subsidies to promote the employment of environmentwise innovations are expected to become common practice, in a large number of countries. A model is developed to determine the appropriate subsidy level that induces the replacement of all existing old-technology units within a specified time period. Alternatively, given the subsidy level, the model allows the determination of the required time period. The proposed method could be used to assess the effectiveness of subsidy based policies in the promotion of low pollution vehicles.

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