Analysis and Comparison of China’s Biofuel Ethanol Subsidy Modes

Abstract

Choosing an effective subsidy mode is crucial for promoting the healthy development of the biofuel ethanol industry. After considering the differences in the social welfare effects of different subsidy models, we construct a Stackelberg game model to examine the chain of the fuel ethanol industry consisting of a downstream channel intermediary as the leader and an upstream production enterprise as the follower. We then discuss how the R&D subsidy mode and production subsidy mode affect social welfare, and what kind of subsidy mode should be adopted under different conditions. The study found that different subsidy modes affect corporate profits and consumer surplus by affecting the price and demand of fuel ethanol, which in turn affect the level of social welfare. In addition, the study found that both R&D subsidy mode and production subsidy model are not always efficient. The optimal subsidy mode depends mainly on the R&D difficulty coefficient and the slope of the inverse demand function.