Industrial policy and global public goods provision: rethinking the environmental
6 January 2023
The figures illustrate the opposing effects of trade on profit and consumer surplus: the further country j is from the technological frontier, the more trade reduces overall consumer surplus, and the more it increases firm i’s profits (firm j’s profits are not plotted as the ratio is always 0). [...] Under Bertrand competition and with downstream subsidies, the low cost coun- try chooses a subsidy which internalizes the domestic part of the public good and eliminates the domestic loss in consumer surplus from the monopoly, which is proportionate to the rent which the low cost firm extracts due to the high cost firm’s distance to frontier. [...] Each country will therefore wish to reduce subsidies, thereby shifting the burden of public goods provision onto the other country, up until the point at which the subsidy is optimal even if the country is the sole supplier and subsidizer of the technology. [...] In autarky, the low cost country would set a subsidy which eliminates the deadweight loss from the monopoly and internalizes the domestic part of the public good, leading to the same domestic outcome as that which is obtained when sproducerj = c(d−1)−ε and sconsumer = sconsumer = b i j 2. [...] 22 Note: The Figure shows the share of the top 10 producers in global shipments of solar PV generation capacity for the years 2000 (when the top 10 captured 88% of global market share), 2005, 2010, and 2015 (when the share of the top 10 had declined to 53%).