On the Effectiveness of Uniform Subsidies in Increasing Market Consumption

We provide a new modeling framework to analyze a subsidy allocation problem with endogenous market response, under a budget constraint on the total amount of subsidies that the central planner can pay. The central planner’s objective is to maximize the aggregated market consumption of a good, or equivalently, to maximize the consumer surplus. Using our framework, we identify sufficient conditions on the firms’marginal cost functions, such that uniform subsidies are optimal. That is, the simple policy that allocates the same subsidy to every firm is optimal, even if the firms are heterogeneous, and their efficiency levels are arbitrarily different. This is an important insight because uniform subsidies is a policy commonly used in practice, primarily because of its simplicity and perceived fairness. Moreover, we prove that, in many cases, uniform subsidies do not only obtain the optimal aggregated market consumption, but at the same time obtain the best social welfare solution. Furthermore, we show that the optimality of uniform subsidies is usually preserved, even if the central planner is uncertain about the specific market conditions. Finally, we present simulation results in relevant settings where uniform subsidies are not optimal. They suggest that the aggregated market consumption induced by uniform subsidies is relatively close to the one induced by optimal subsidies.