Should environmental R&D be supported more than other R&D projects?

Abstract

An innovator may not be able to capture the full social benefit of her innovation. Governments therefore support private R&D through various measures. We compare a market good innovation with an abatement technology innovation with the same potential to increase social surplus. The first-best outcome can be reached by offering an innovation prize and a diffusion subsidy. The innovation prize should be greatest for an abatement technology innovation, whereas the diffusion subsidy should be greatest for a market good innovation.