Industries involved in Green technology

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Georgia Perakis of the MIT Sloan School of Management has developed a model that will help government decision makers set optimal subsidies to encourage the adoption of a green technology, taking into account the probable responses of suppliers and buyers of the new technology. Photo: Justin Knight

Overview

To encourage the adoption of green technologies, some governments are providing subsidies to consumers who buy solar panels, electric vehicles, and the like. A new MIT model can help policy makers determine the level of subsidy needed to meet a future technology adoption target at minimal cost. For any target, the model calculates the government’s optimal subsidy and the technology supplier’s optimal production quantity and selling price (for maximum profit). Critical to the optimization process is a prediction of consumer response based not only on the price and rebate but also on factors such as environmental values and familiarity with the technology. Analyses show that meeting the target requires recognizing the full range of possible demand outcomes—and the more uncertain the future demand, the better the deal for consumers will be.

When governments offer consumer subsidies on green technologies, the goal is generally to achieve some critical level of demand that will serve to bring down prices, encourage product improvements, establish wider familiarity, and ensure a continuing stream of future customers. But setting a subsidy that will elicit the desired response while minimizing government expenditures is difficult. Part of the problem is that policy makers don’t know in advance how consumers will respond to a given subsidy. They also don’t know how suppliers of the green technology will behave.Modeling market dynamics as a Stackelberg game Although the subsidies are paid directly to consumers, suppliers will take them into account as they decide on future production quantities and sales prices— and like the policy makers, the suppliers must make their decisions without knowing how consumers will respond.

“Policy makers cannot develop effective subsidy programs for green technologies without a clear understanding of what drives consumers to adopt the technologies and companies to invest in them, ” says Georgia Perakis, the William F. Pounds Professor of Operations Management and Operations Research/Statistics. To help policy makers—and suppliers—make the best decisions they can, she and her co-workers developed a model that describes consumer behavior and created a comprehensive framework that examines supplier decision making and then optimizes subsidies for a range of adoption targets.

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