Designing Subsidies

Governor Blabla has decided that, rather than build a new nuclear power plant to service power needs, the state should save an equivalent amount of energy. As one component of an efficiency plan, he has turned to you, his top aide, to design a policy to encourage adoption of low-emitting diode (LED) light bulbs. Recall from Chapter 8 that although LEDs save a tremendous amount of money (and energy) over their lifetime, they are quite expensive initially ($5-15 or so per bulb). You've thought up three possibilities:

Utility Rebates Have publicly regulated electric companies provide "rebates" of 75% of the purchase price to consumers who install LED bulbs. Allow utilities to cover the cost of the program through higher electricity rates.

Government Procurement Contract Have the state government agree to purchase, using general tax revenues, a large quantity of bulbs from an in-state supplier (at competitive rates). The bulbs would be used to retrofit government buildings.
R&D Subsidies Provide funds from general tax revenues to in-state firms to develop LED bulbs that can be sold at lower cost and/or are more comparable to standard incandescent bulbs. Continued receipt of such subsidies should be conditional on cost reductions or performance enhancements.

1. For each of the three plans, answer the following questions:

a. What obstacles to successful implementation might arise?

b. If you had to pick one policy to push for, which would it be? Why?