The Effect of Government Support on Green Product Design and Environmental Impact

Abstract

We study competing firms' green product design decisions, and the effect of two common types of government support, namely R&D support and sales subsidies, on the products, firms and the resulting environmental impact. Each firm produces a product that contains a "traditional" quality and an "environmental" quality according to corresponding technology capabilities of the firm and market competition. Our main results are as follows. First, we show that firms will produce greener products and charge higher prices when they embrace greater technology capabilities related to production of the environmental quality, or when consumers become more conscious of the environmental impact. Second, we find that although both the government R&D support and sales subsidies prompt firms to produce greener products, the overall environmental impact is mixed. Specifically, while sales subsidies generally lead to positive environmental benefits, R&D support can have an unanticipated negative overall impact on the environment. Third, we show that firms do not always benefit from either type of the government support.

Keywords: green product development; market competition; government support; environmental impact.