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Welfare Effects of Subsidizing a Dead-End Network of Less Polluting Vehicles

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Document pages: 26 pages

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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