Demand subsidy versus production regulation: Development of new energy vehicles in a competitive environment

Abstract

In the competitive market environment, the growth of new energy vehicles (NEVs) faces many obstacles. Demand subsidy or production regulation-related policies are widely used to promote the development of NEVs. A comparative analysis of the effects of the two types of policies on the competitive vehicle market requires further study. To fill this gap, we investigate which type of policy is more preferable from the perspective of the social planner. In this paper, we construct a Stackelberg game with a welfare-maximizing social planner and two profit-maximizing manufacturers producing NEVs and fuel vehicles (FVs), respectively. Interestingly, although both types of policies can increase the quantity of NEVs, demand subsidy also promotes the growth of total vehicles at the same time; in contrast, production regulation reduces the total vehicles. Moreover, compared with the benchmark that no policy intervention, demand subsidy generally improves social welfare, while production regulation improves social welfare only with high consumer preference for NEVs. Nevertheless, production regulation always has a positive impact on the environment, whereas demand subsidy may have a positive impact only when the NEV is very environment friendly. The numerical results show that consumer environmental preferences and the regulation of environmental impact determine which type of policy dominates the other.