Modeling Government Subsidy Strategies for Railway Carriers: Environmental Impacts and Industry Competition

Abstract

In this paper, we investigate the government’s optimal subsidy strategy for the China–Europe Railway Express (CERE) considering environmental impacts and industry competition. Specifically, we consider three subsidy options: no subsidies, subsidies to CERE carriers, and subsidies to shippers. A game theory framework is developed to analyze the problem of developing a sustainable supply chain consisting of the government, competitive carriers, and shippers. First of all, we find that for the government, indirect subsidies to CERE carriers and direct subsidies to shippers lead to the same total social welfare. We then examine the conditions for phasing out government subsidies. Our results indicate that the government’s optimal subsidy strategy switches at a threshold level of CERE’s environmental advantage. In particular, when the environmental advantage of CERE is high, the government should subsidize CERE by subsidizing either the carrier or shipper. In contrast, when the environmental advantage of CERE is low, the government should opt out of subsidies. At last, we find that this threshold of CERE’s environmental advantage is further impacted by CERE’s capacity and marginal operating costs. This study differs from prior research by investigating various subsidy strategies while taking into account CERE’s emission advantage and the timing of subsidy withdrawal.