Subsidies problems

In the first years of gasohol use some starting and driveabiUty problems were reported (19). Not all vehicles experienced these problems, however, and better fuel economy was often indicated even though the energy content of the fuel was reduced. Gasohol was exempted from the federal excise tax amounting to a 0.16/L ( 0.60/gal) subsidy. Without this subsidy, ethanol would be too expensive for use even as a fuel additive. 

One problem with fuel taxes, continuing fines, and effluent fees is how to use the funds collected most effectively. Among the ideas which have been developed are to use the funds as the basis for loans or subsidies for... 

Economists differ widely in their views on the practical importance of these market failures, on what remedies are appropriate, and whether governments can satisfactorily remedy the problem. One clear principle is that the problem be identified as precisely as possible and the assistance be targeted as closely as possible to the problem. For example, if information is inadequate, providing knowledge about options would be preferable to aiding a specific option. The three justifications for subsidies set a minimum test of aid that many programs fail to pass. 

Leaving Louisiana and its racial problems behind, Rillieux returned permanently to France around the time of the Civil War. Fearful of losing their federal subsidies, most Louisiana sugar planters initially opposed secession. Nonetheless, when their state seceded in January 1861, most supported the Confederacy. In the end, the war destroyed their sugar plantations and freed their slaves. According to some reports, Rillieux returned to France before the war, but his closest French associate wrote that Rillieux left the United States after the war, exhausted and asking for nothing but rest. ... 

Siemens Solar reports the interest in solar from consumers has been sometimes overwhelming and that supply has been a problem. Most U.S. manufactured units are shipped to countries such as Germany, Japan and Scandinavia, which have had generous subsidies for years. 

In this chapter 1 examine and compare three proposals recently made to stimulate private involvement in developing pharmaceuticals for neglected diseases (1) Kremer and Glennerster (2004) and the Center for Global Development (2005) have described in detail a plan for Advanced Purchase Commitments for vaccines, which would commit a global body to pay a fixed subsidy per vaccine delivered for certain diseases, if the vaccine meets prespecified technical requirements and is priced below some level. This would help to solve both access and incentive problems, but is necessarily... 

For example, one of the technical characteristics that might be specihed is the effectiveness of the vaccine in giving protection over a period of, say, two years. Suppose a vaccine is developed such that only 50% of the people vaccinated appear to obtain protection. This can raise two problems. If the partially effective vaccine is determined inadmissible to be paid under the Advanced Purchase Commitment plan, despite bringing immense health benehts to millions of people, the innovator is not adequately compensated. But, if it is deemed admissible (perhaps only for a scaled reward), the Advanced Purchase Commitment funding could be used up in a short time, so that a second, 100% effective vaccine expected to arrive two years later might obtain no Advanced Purchase Commitment subsidy at all. 

The difficulty here is that firms incentives to undertake research on potentially very valuable innovations are distorted firms will have strong incentives to exactly meet the technical requirements, but very weak incentives to exceed them or to develop useful vaccines that do not meet them. The essence of the problem lies in the requirement for the sponsor to specify the characteristics of a product that has not yet been developed flexibility is required, because of uncertainty but flexibility puts a great deal of discretion in the hands of the committee judging whether to pay a subsidy, and if so, how much. Farlow and his coauthors complain that such discretion renders the Advanced Purchase Commitment program committee-driven rather than market-driven. ... 

End-to-end strategies leave R D decisions in the hands of industry. The most natural way to extend these strategies is to let the industrial partner own patent rights over and above the basic end-to-end reward. Alternatively, sponsors can dispense with end-to-end rewards entirely by paying a subsidy to the private partner s R D program. In either case, sponsors face the usual difficulty of deciding how much reward is actually needed to elicit investment. However, this problem is harder now because the private partner can usually estimate the value of patent rights better than the sponsor can. This increases the sponsor s risk of overpayment. 

A variant that addresses this problem are the proposals to target R D tax credits toward research on malaria, HIV/AIDS, and tuberculosis. But tax credits do not even have the reputation incentive (reputation is built up by success fully using previous grant money). If recipient research organizations are put at risk for some of their own funds (e.g., the part not funded through a tax credit or by mandatory subsidy matching), the moral hazard problem should be attenuated. ... 

Conceptually and administratively, the most substantial problems are with setting the public subsidy. We have discussed a limited subsidy plan not mentioned in the lOM report, which would be set only at the level of estimated medical and financial externalities. Such a subsidy would address the main market failure attributable to individuals not taking account of the benefit to others when they are vaccinated, which is likely to be reflected in insufficient demand for vaccinations as a covered private health insurance benefit. 

For further discussion, see, e.g., Gallini and Scotchmer (2002). In spite of the potential moral hazard problem (firms conducting R D receive tax subsidies even if the research is not successful, thereby potentially reducing the firm s effort), they are often recommended. See e.g., Offit (2005). 

The real profitability of different products becomes more transparent as cross-subsidies among product lines are exposed. This is a problem intrinsic to the highly integrated production processes of many chemical companies. 

Nevertheless, the devolution of allocation responsibilities does cause significant problems. The most notable area is with respect to new-entrant rules, where free allocation forms a subsidy to new investments. This raises the prospect of a race to the bottom as Member States compete to attract investment - though such subsidies are usually at a macroeconomic cost, in this case exacerbated by the need to then cut back emissions more elsewhere in the economy (or to buy international credits) to comply with Kyoto targets. 

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