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

Overcoming a technological lock-in by means of governmental intervention may be welfare enhancing, even if the implemented technology will be replaced by a better one at a certain time in the future. This holds, if the environmental externality of the implemented technology is small relative to that of the established technology and/or if the network effect of the installed base of service stations is small. If consumers’ and politicians’ discounting of future payoffs is high, the implementation even of dead-end technologies could be sensible, but policy makers with higher preferences for future payoffs may decide not to overcome lock-in by a new green, but dead-end technology. Governments promoting alternatives to gasoline-driven vehicles must be aware of opposing welfare effects for open-ended and dead-end technologies. Copyright Springer Science+Business Media New York 2014