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Welfare effects of subsidizing a dead-end network of less polluting vehicles

Dietrich, Antje-Mareike and Sieg, Gernot (2011): Welfare effects of subsidizing a dead-end network of less polluting vehicles.

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Abstract

This article shows that in the presence of environmental externalities, it may be welfare enhancing to overcome a technological lock-in by a dead- end technology through governmental intervention. It is socially desirable to subsidize a dead-end technology if its environmental externality is small relative to the one of the established technology, if the installed base and/or the strength of the network effect is small and if future generations matter. Applying our results to the private transport sector, governments promoting alternatives to gasoline-driven vehicles have to be aware of these opposing welfare effects.

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