Learning-by-doing and the incidence of the green consumption subsidy

This paper presents a two-period general equilibrium model that incorporates the firm's learning-by-doing under the green subsidies. I use a dynamic version of the Dixit-Stiglitz monopolistic competition model to analyze the impact of the introduction of green subsidies in the presence of pre-existing effluent taxes. I first show that the introduction of green subsidies promotes the demand for green goods, and consumers are better off each period. I then show that even when the green subsidies directly accrue to consumers, firms in the green sector also benefit via boosted demand for green goods. The learning-by-doing effect accelerates the speed of expansion of the green sector in the face of green subsidies. On the other hand, even when the demand for the green goods increases, and greater pollution may result from meeting the increased demand as a whole, environmental quality may still improve if the technology is good enough to sufficiently boost the net positive impact of green consumption on the environment.